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Section 1.2 Introduction to Economics
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Traditional Economy
Tradition is a way of thinking, behaving,
or acting that has been used by a group of
people for a long period of time. A traditional
economy is one in which economic decisions
are based on a society’s values, culture, and
customs. Traditional economies existed early
in human history and are still found today in
underdeveloped nations.
Countries with traditional economies
typically have large rural populations that
rely on farming and hunting activities to meet
basic needs. Most citizens in a traditional
economy have just enough to survive. There is
usually little to no manufacturing in this type
of economy. So, most people trade or barter for
goods and services they cannot produce on their
own. To barter is to exchange one good or service
for another good or service.
Command Economy
In a command economy, the government
makes all the economic decisions for its citizens.
The government decides how to answer the three
economic questions. A command economy is
also called a centrally-planned economy because a
central government makes all decisions.
Command economies are found in communist
and socialist societies. In this type of economy, the
government owns and controls all the factors of
production, decides how much will be produced,
and sets the prices of goods and services. Ideally, the
government makes sure that all citizens get an equal
share of the limited resources available. It ensures
that jobs are available to everyone and provides
education, medical care, and housing. However,
citizens give up much individual freedom in a
command economy. The nations of North Korea and
Cuba are current examples of command economies.
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Nations must choose how to use their scarce resources of land, labor, capital, and entrepreneurship to create
goods and services.