Chapter 1.3 Economic SystemsPrinciples of Business

Chapter 1.3: Economic Systems

• Goals• Identify the three economic questions.• Differentiate among the main types of

economic systems.• Describe the economic system of the

United States.

3 Key Economic Questions

1) What goods and services are to be produced?

2) How should the goods and services be produced?

3) What needs and wants will be satisfied with the goods and services produced?

1) What to Produce?

• What goods and service are to be produced?

• Every nation is different• We must learn how to best use our

resources.

2) How to Produce?

• How should the goods and services be produced?

• What resources will be used?• Human?• Machinery/Technology?

3) What needs and wants to satisfy?

• Needs/Wants are Unlimited• Which will be met?• Who’s needs and wants are most

critical?• How will goods and services be

distributed?• Goods and services shared equally?• If you contribute more should you get

more?

Types of Economic Systems

• What is an Economic System?• The method a country uses to answer the

three economic questions.• How much is the Government involved?

• 3 Main Types:• Command• Market• Traditional

Command Economy

• Resources are owned and controlled by the government.• Economic questions answered by owners

of the resources.• Government decides:

• what and how goods will be produced• how they will be shared.

• Personal economic choices are limited.

Command Economy

• Leaders use military force to carry out plans.

• Freedom of the people is always limited in this system.

• Examples: Saudi Arabia, Vietnam, Cuba, & North Korea

Market Economy

• Resources are owned and controlled by the people of the country.

• Generally found in democratic forms of government.

• No one tells consumers what to buy or businesses what to sell.

Market Economy

• Buyers and Sellers answer the 3 ?’s by what they buy and sell in the marketplace.

• Marketplace: anywhere that goods and services exchange hands.

• Examples: the supermarket, the internet, a flea market, etc.

Market Economy

• “What to produce?”• What are the people buying?

• “How to produce?”• Resources are combined to produce the

goods people want and buy.• “What needs and wants to satisfy?”

• People buy what they want and can afford.

Traditional Economy

• Goods are produced the way they always have been produced.• Operate according to tradition or custom.• Children taught to use methods of their

ancestors.• Goods produced by hand with simple tools

• People or animals used for energy.• Change and growth occur slowly in this

economy.

Mixed Economy

• Most nations of the world can be classified as a mixed economy.• Use both command and market ideas.• Russia & China

• Command economies changing into mixed economies.

What is the United States

• We are a Market Economy• Our economic system also has other

names.1) Capitalism2) Free (Private) Enterprise System

• All 3 are essentially the same thing!

What is Capitalism?

• The private ownership of economic resources by individuals.

• Owners are free to decide what they will produce with the resources.

Our American Economic Principles

• Capitalism is based on 4 important principles:

1) Private Property2) Freedom of Choice3) Profit4) Competition

1) Private Property

• You can own, use, or dispose of things of value.• As long as it doesn’t break the law.• Examples?

2) Freedom of Choice

• You have the right to:• Buy where and what you please.• Organize with other workers (union).• Travel when and where you please.• Express your opinions.

• Capitalism provides greater freedom of choice to the individual.

3) Profit

• Sales – Expenses = Profit• The primary reason that businesses

supply goods/services!

4) Competition

• Rivalry among businesses to sell their goods and services to buyers.

• Competition = Choices for Consumers• Businesses must:

• Improve products• Offer better services• Keep prices reasonable• Produce new things.

Chapter 1.3: Economic Systems

• Goals• Identify the three economic questions.• Differentiate among the main types of

economic systems.• Describe the economic system of the

United States.

Chapter 1.3: Economic Systems

• Objective: Identify four principles of our market economy.

• Assignment: Write in complete sentences.• What does a right to earn a profit influence

a business owner to do?• Give three ways in which consumers

benefit from competition among businesses?