{"id":2793,"date":"2023-02-19T16:10:49","date_gmt":"2023-02-19T16:10:49","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/chapter\/learn-it-2-2-1-understanding-economic-systems\/"},"modified":"2023-12-22T13:44:49","modified_gmt":"2023-12-22T13:44:49","slug":"learn-it-2-2-1-understanding-economic-systems","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/chapter\/learn-it-2-2-1-understanding-economic-systems\/","title":{"raw":"Learn It 2.2.1: Understanding Economic Systems","rendered":"Learn It 2.2.1: Understanding Economic Systems"},"content":{"raw":"<section class=\"textbox learningGoals\">\r\n<ul>\r\n\t<li><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Recognize the differences between market, planned, and mixed economies&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:15233,&quot;3&quot;:{&quot;1&quot;:0},&quot;10&quot;:0,&quot;11&quot;:4,&quot;12&quot;:0,&quot;14&quot;:{&quot;1&quot;:2,&quot;2&quot;:0},&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:10}\">Recognize the differences between market, planned, and mixed economies<\/span><\/li>\r\n<\/ul>\r\n<\/section>\r\n<h2>Global Economic Systems<\/h2>\r\n<p>Businesses and other organizations operate according to the economic systems of their home countries. Today, the world\u2019s major economic systems fall into two broad categories: free market economies based on <strong>capitalism<\/strong>; and planned economies, which include <strong>communism<\/strong> and <strong>socialism<\/strong>. However, many countries use a <strong>mixed economy<\/strong> that incorporates elements from more than one system.<\/p>\r\n<p>The major differentiator among economic systems is whether the government or individuals decide:<\/p>\r\n<ul>\r\n\t<li>How to allocate limited resources\u2014the factors of production\u2014to individuals and organizations to best satisfy unlimited societal needs<\/li>\r\n\t<li>What goods and services to produce and in what quantities<\/li>\r\n\t<li>How and by whom these goods and services are produced<\/li>\r\n\t<li>How to distribute goods and services to consumers<\/li>\r\n<\/ul>\r\n<p>Managers must understand and adapt to the economic system or systems in which they operate. Companies that do business internationally may discover that they must make changes in production and selling methods to accommodate the economic system of other countries. The following table summarizes important characteristics of the world's economic systems.<\/p>\r\n<table style=\"width: 100%;\" data-id=\"btab-001\">\r\n<thead>\r\n<tr>\r\n<th style=\"text-align: center; width: 97.6149%;\" colspan=\"5\" scope=\"col\" data-align=\"center\">The Basic Economic Systems of the World[footnote]https:\/\/openstax.org\/books\/introduction-business\/pages\/1-3-how-business-and-economics-work[\/footnote]<\/th>\r\n<\/tr>\r\n<tr>\r\n<th style=\"width: 20.2725%;\" scope=\"col\">\u00a0<\/th>\r\n<th style=\"width: 17.8876%;\" scope=\"col\">Capitalism<\/th>\r\n<th style=\"width: 19.0801%;\" scope=\"col\">Communism<\/th>\r\n<th style=\"width: 21.1243%;\" scope=\"col\">Socialism<\/th>\r\n<th style=\"width: 19.2504%;\" scope=\"col\">Mixed Economy<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td style=\"width: 20.2725%;\"><strong>Ownership of Business<\/strong><\/td>\r\n<td style=\"width: 17.8876%;\">Businesses are privately owned with minimal government ownership or interference.<\/td>\r\n<td style=\"width: 19.0801%;\">Government owns all or most enterprises.<\/td>\r\n<td style=\"width: 21.1243%;\">Basic industries such as railroads and utilities are owned by government. Very high taxation as government redistributes income from successful private businesses and entrepreneurs.<\/td>\r\n<td style=\"width: 19.2504%;\">Private ownership of land and businesses but government control of some enterprises. The private sector is typically large<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 20.2725%;\"><strong>Control of Markets<\/strong><\/td>\r\n<td style=\"width: 17.8876%;\">Complete freedom of trade. No or little government control.<\/td>\r\n<td style=\"width: 19.0801%;\">Complete government control of markets.<\/td>\r\n<td style=\"width: 21.1243%;\">Some markets are controlled, and some are free. Significant central-government planning. State enterprises are managed by bureaucrats. These enterprises are rarely profitable.<\/td>\r\n<td style=\"width: 19.2504%;\">Some markets, such as nuclear energy and the post office, are controlled or highly regulated.<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 20.2725%;\"><strong>Worker Incentives<\/strong><\/td>\r\n<td style=\"width: 17.8876%;\">Strong incentive to work and innovate because profits are retained by owners.<\/td>\r\n<td style=\"width: 19.0801%;\">No incentive to work hard or produce quality products.<\/td>\r\n<td style=\"width: 21.1243%;\">Private-sector incentives are the same as capitalism, and public-sector incentives are the same as in a planned economy.<\/td>\r\n<td style=\"width: 19.2504%;\">Private-sector incentives are the same as capitalism. Limited incentives in the public sector.<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 20.2725%;\"><strong>Management of Enterprises<\/strong><\/td>\r\n<td style=\"width: 17.8876%;\">Each enterprise is managed by owners or professional managers with little government interference.<\/td>\r\n<td style=\"width: 19.0801%;\">Centralized management by the government bureaucracy. Little or no flexibility in decision-making at the factory level.<\/td>\r\n<td style=\"width: 21.1243%;\">Significant government planning and regulation. Bureaucrats run government enterprises.<\/td>\r\n<td style=\"width: 19.2504%;\">Private-sector management similar to capitalism. Public sector similar to socialism.<\/td>\r\n<\/tr>\r\n<tr>\r\n<td style=\"width: 20.2725%;\"><strong>Examples<\/strong><\/td>\r\n<td style=\"width: 17.8876%;\">United States<\/td>\r\n<td style=\"width: 19.0801%;\">Cuba, North Korea<\/td>\r\n<td style=\"width: 21.1243%;\">Finland, India, Israel<\/td>\r\n<td style=\"width: 19.2504%;\">Great Britain, France, Sweden, Canada<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<section class=\"textbox tryIt\">[ohm2_question height=\"350\"]3441[\/ohm2_question]<\/section>","rendered":"<section class=\"textbox learningGoals\">\n<ul>\n<li><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Recognize the differences between market, planned, and mixed economies&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:15233,&quot;3&quot;:{&quot;1&quot;:0},&quot;10&quot;:0,&quot;11&quot;:4,&quot;12&quot;:0,&quot;14&quot;:{&quot;1&quot;:2,&quot;2&quot;:0},&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:10}\">Recognize the differences between market, planned, and mixed economies<\/span><\/li>\n<\/ul>\n<\/section>\n<h2>Global Economic Systems<\/h2>\n<p>Businesses and other organizations operate according to the economic systems of their home countries. Today, the world\u2019s major economic systems fall into two broad categories: free market economies based on <strong>capitalism<\/strong>; and planned economies, which include <strong>communism<\/strong> and <strong>socialism<\/strong>. However, many countries use a <strong>mixed economy<\/strong> that incorporates elements from more than one system.<\/p>\n<p>The major differentiator among economic systems is whether the government or individuals decide:<\/p>\n<ul>\n<li>How to allocate limited resources\u2014the factors of production\u2014to individuals and organizations to best satisfy unlimited societal needs<\/li>\n<li>What goods and services to produce and in what quantities<\/li>\n<li>How and by whom these goods and services are produced<\/li>\n<li>How to distribute goods and services to consumers<\/li>\n<\/ul>\n<p>Managers must understand and adapt to the economic system or systems in which they operate. Companies that do business internationally may discover that they must make changes in production and selling methods to accommodate the economic system of other countries. The following table summarizes important characteristics of the world&#8217;s economic systems.<\/p>\n<table style=\"width: 100%;\" data-id=\"btab-001\">\n<thead>\n<tr>\n<th style=\"text-align: center; width: 97.6149%;\" colspan=\"5\" scope=\"col\" data-align=\"center\">The Basic Economic Systems of the World<a class=\"footnote\" title=\"https:\/\/openstax.org\/books\/introduction-business\/pages\/1-3-how-business-and-economics-work\" id=\"return-footnote-2793-1\" href=\"#footnote-2793-1\" aria-label=\"Footnote 1\"><sup class=\"footnote\">[1]<\/sup><\/a><\/th>\n<\/tr>\n<tr>\n<th style=\"width: 20.2725%;\" scope=\"col\">\u00a0<\/th>\n<th style=\"width: 17.8876%;\" scope=\"col\">Capitalism<\/th>\n<th style=\"width: 19.0801%;\" scope=\"col\">Communism<\/th>\n<th style=\"width: 21.1243%;\" scope=\"col\">Socialism<\/th>\n<th style=\"width: 19.2504%;\" scope=\"col\">Mixed Economy<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td style=\"width: 20.2725%;\"><strong>Ownership of Business<\/strong><\/td>\n<td style=\"width: 17.8876%;\">Businesses are privately owned with minimal government ownership or interference.<\/td>\n<td style=\"width: 19.0801%;\">Government owns all or most enterprises.<\/td>\n<td style=\"width: 21.1243%;\">Basic industries such as railroads and utilities are owned by government. Very high taxation as government redistributes income from successful private businesses and entrepreneurs.<\/td>\n<td style=\"width: 19.2504%;\">Private ownership of land and businesses but government control of some enterprises. The private sector is typically large<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 20.2725%;\"><strong>Control of Markets<\/strong><\/td>\n<td style=\"width: 17.8876%;\">Complete freedom of trade. No or little government control.<\/td>\n<td style=\"width: 19.0801%;\">Complete government control of markets.<\/td>\n<td style=\"width: 21.1243%;\">Some markets are controlled, and some are free. Significant central-government planning. State enterprises are managed by bureaucrats. These enterprises are rarely profitable.<\/td>\n<td style=\"width: 19.2504%;\">Some markets, such as nuclear energy and the post office, are controlled or highly regulated.<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 20.2725%;\"><strong>Worker Incentives<\/strong><\/td>\n<td style=\"width: 17.8876%;\">Strong incentive to work and innovate because profits are retained by owners.<\/td>\n<td style=\"width: 19.0801%;\">No incentive to work hard or produce quality products.<\/td>\n<td style=\"width: 21.1243%;\">Private-sector incentives are the same as capitalism, and public-sector incentives are the same as in a planned economy.<\/td>\n<td style=\"width: 19.2504%;\">Private-sector incentives are the same as capitalism. Limited incentives in the public sector.<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 20.2725%;\"><strong>Management of Enterprises<\/strong><\/td>\n<td style=\"width: 17.8876%;\">Each enterprise is managed by owners or professional managers with little government interference.<\/td>\n<td style=\"width: 19.0801%;\">Centralized management by the government bureaucracy. Little or no flexibility in decision-making at the factory level.<\/td>\n<td style=\"width: 21.1243%;\">Significant government planning and regulation. Bureaucrats run government enterprises.<\/td>\n<td style=\"width: 19.2504%;\">Private-sector management similar to capitalism. Public sector similar to socialism.<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 20.2725%;\"><strong>Examples<\/strong><\/td>\n<td style=\"width: 17.8876%;\">United States<\/td>\n<td style=\"width: 19.0801%;\">Cuba, North Korea<\/td>\n<td style=\"width: 21.1243%;\">Finland, India, Israel<\/td>\n<td style=\"width: 19.2504%;\">Great Britain, France, Sweden, Canada<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<section class=\"textbox tryIt\"><iframe loading=\"lazy\" id=\"ohm3441\" class=\"resizable\" src=\"https:\/\/ohm.one.lumenlearning.com\/multiembedq.php?id=3441&theme=lumen&iframe_resize_id=ohm3441&source=tnh&show_question_numbers\" width=\"100%\" height=\"350\"><\/iframe><\/section>\n<hr class=\"before-footnotes clear\" \/><div class=\"footnotes\"><ol><li id=\"footnote-2793-1\">https:\/\/openstax.org\/books\/introduction-business\/pages\/1-3-how-business-and-economics-work <a href=\"#return-footnote-2793-1\" class=\"return-footnote\" aria-label=\"Return to footnote 1\">&crarr;<\/a><\/li><\/ol><\/div>","protected":false},"author":21,"menu_order":9,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Reading: Economic Systems\",\"author\":\"Steven Greenlaw and Lumen Learning\",\"organization\":\"\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Principles of Microeconomics 1.4\",\"author\":\"OpenStax\",\"organization\":\"Rice University\",\"url\":\"http:\/\/cnx.org\/contents\/6i8iXmBj@10.170:n_POCARx@12\/How-Economies-Can-Be-Organized\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"Download for free at http:\/\/cnx.org\/content\/col11627\/latest\"}]","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"part":2786,"module-header":"learn_it","content_attributions":[{"type":"original","description":"Reading: Economic Systems","author":"Steven Greenlaw and Lumen Learning","organization":"","url":"","project":"","license":"cc-by","license_terms":""},{"type":"cc","description":"Principles of Microeconomics 1.4","author":"OpenStax","organization":"Rice University","url":"http:\/\/cnx.org\/contents\/6i8iXmBj@10.170:n_POCARx@12\/How-Economies-Can-Be-Organized","project":"","license":"cc-by","license_terms":"Download for free at http:\/\/cnx.org\/content\/col11627\/latest"}],"internal_book_links":[],"video_content":null,"cc_video_embed_content":{"cc_scripts":"","media_targets":[]},"try_it_collection":null,"_links":{"self":[{"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/pressbooks\/v2\/chapters\/2793"}],"collection":[{"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/wp\/v2\/users\/21"}],"version-history":[{"count":10,"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/pressbooks\/v2\/chapters\/2793\/revisions"}],"predecessor-version":[{"id":8694,"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/pressbooks\/v2\/chapters\/2793\/revisions\/8694"}],"part":[{"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/pressbooks\/v2\/parts\/2786"}],"metadata":[{"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/pressbooks\/v2\/chapters\/2793\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/wp\/v2\/media?parent=2793"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/pressbooks\/v2\/chapter-type?post=2793"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/wp\/v2\/contributor?post=2793"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/wp\/v2\/license?post=2793"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}