3.5  About Economic Systems



Every day you make dozens of decisions. You might decide to go to work or to a movie, buy the expensive headphones or the cheaper ones. These decisions are all economic decisions. All individuals and all groups in every society face similar economic decisions because it seems there is "just never enough to go around."

Every country or society has citizens with unlimited wants and needs but only limited resources to meet those wants and needs. In other words, there are never enough resources to fulfill everyone's wants and needs. There are limited amounts of resources — "just never enough to go around." This produces the basic economic problem of scarcity.

Scarcity forces individuals and society to make choices when answering the three basic economic questions:

  • What goods should be produced? Should only those goods that satisfy people's basic needs be produced or should there be other goods as well? Who should decide this: the government, businesses, or the people?

  • How should goods be produced? What's the best way to make the goods given the resources available? Who should decide this: the government, businesses, or the people?

  • Who should get the goods (how should they be distributed)? Should only those who can afford to pay for the goods get them or should everyone have equal access? Who should decide this: the government, businesses, or the people?

While answering the basic economic questions, societies must also consider making the best use of their limited resources called means of production:

  • land: natural resources used in the production of goods and services.

  • labour: work done by humans used in the production of goods and services.

  • capital: the buildings, money, and equipment used in the production of goods and services.



This diagram is an economic model that summarizes how countries organize their economic systems to solve the problem of scarcity. When you look at this model of a economic system, you will see the essential features of any economic system:


An Economic System

  • is the organized way in which decisions are made about how resources will be used in a society

  • is an organized model for decision making about the distribution of limited resources

  • includes basic resources of society—land, labour, and capital—known as the means of production

  • includes unlimited demands made for the limited resources

  • includes decisions—individualism or collectivism—that must be made because of limited resources (scarcity)

  • decides what goods will be produced

  • decides how goods will be produced

  • decides how goods will be distributed



This model demonstrates how a society organizes its economic system, but the direction the economic system takes is based on one of the following ideologies or perhaps a combination of both:

  • Individualism: businesses and people make economic decisions about scarcity without government involvement, which benefits the common good.

  • Collectivism: government makes economic decisions about scarcity for the common good of the collective group.