Chapter 2 – Economic Systems

• Section 1: 3 Economic Questions• Section 2: Market Economy• Section 3: Centrally Planned Economy• Section 4: Modern Economies

Economic Systems

• A method used to produce and distribute goods and services.

–What goods and services should be produced? –How should these goods and services

be produced? –Who consumes these goods and

services?

3 Basic Economic Questions

Economic Goals and ValuesEconomic Efficiency – Making the most of resources.

Economic Freedom - Freedom from government intervention in the production and distribution of goods and services

Economic Security - Assurance that goods and services will be available, payments will be made on time, and a safety net will protect individuals in times of economic disaster

• Economic equity - Fair distribution of wealth, Does America have economic equity?

• Economic growth - Innovation leads to economic growth, and economic growth leads to a higher standard of living.

• Other goals - Societies pursue additional goals, such as environmental protection.

Economic Goals and Values

• Traditional economies rely on habit, custom, or ritual to decide what to produce, how to produce it, and to whom to distribute it.

• In a centrally planned economy the central government makes all decisions about the production and consumption of goods and services.

• In a market economy economic decisions are made by individuals and are based on exchange, or trade.

• Mixed economies are systems that combine tradition and the free market with limited government intervention.

Four Economic Systems

Jumpstart Assignment• Describe the following political cartoon

Jumpstart Assignment• Describe the

Today’s Agenda

• Jumpstart• Notes: Ch. 2, Sec. 2 and 3• Video: Communism is bad!• Debating the Stimulus

Why do markets exist?• b/c none of us can make everything we need• A market is an arrangement that allows

buyers and sellers to exchange goods and services.

• Specialization is the concentration of the productive efforts of individuals and firms on a limited number of activities.

Free Market – Circular Flow

monetary flow

physical flow

monetary flow

physical flow

Circular Flow Diagram of a Market Economy

Households Firms

Self-Regulating Market (Adam Smith)• Self-interest is the motivating force in the free

market. • Producers in a free market struggle for the dollars

of consumers. This is known as competition, and is the regulating force of the free market.

• The interaction of buyers and sellers, motivated by self-interest and regulated by competition, all happens without a central plan. This phenomenon is called “the invisible hand of the marketplace.”

Centrally Planned Economies• Socialism is a social and political philosophy based

on the belief that democratic means should be used to distribute wealth evenly throughout a society.

• Communism is a political system characterized by a centrally planned economy with all (most)economic and political power resting in the hands of the government (Karl Marx)

Communism = badCapitalism = good

Homework: Answer the following essay question.

• Left Side: Why is socialism a preferable economic system over capitalism?• Right Side: Why is capitalism a

preferable economic system over socialism?

Jumpstart Assignment• What strengths and weaknesses are there to a

centrally planned economy?

Modern Economies• What is wrong with a pure market economy?• Many early economists believed in a laissez

faire philosophy… or a “hands off” approach to the market

• Over time, society’s needs and wants became such that government rules became necessary

monetary flow

physical flow

monetary flow

physical flow

Circular Flow Diagram of a Mixed Economy

Households Firms

Product market

Factor market

Government expendituresexpenditures

government-

owned facto

rs

taxes

taxesgovernment

purchases

Government’s Role in a Mixed EconomyIn a mixed

economy, • The government

purchases land, labor, and capital from households in the factor market, and

• Purchases goods and services in the product market.

Continuum of Mixed Economies

Centrally planned Free market

Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick

Iran

North Korea

Cuba

China

Russia Greece Peru United States

South Africa France United Kingdom

Botswana Canada Singapore

Hong Kong

Comparing Mixed Economies• An economic system that permits the conduct of

business with minimal government intervention is called free enterprise.

Island Game• Take a good look around, because these are the people with whom

you have just been shipwrecked on a distant uncharted island. • As far as you know, you are the only survivors of global catastrophe

and it is up to you to develop a new society. This society should meet your needs, as you define them, and it should avoid the mistakes of "the old ones", those who died in the recent tragedy.

• Use the questions provided to guide your discussion of how you will set up this new society. Record your answers on a separate sheet of paper headed by the name you have given to the island.

• This is a beautiful island. It is tropical (average temperature 80°F), it has many sources of food (fruit trees, fish, land for agriculture), and it has a steady wind from the West of about 15 m.p.h.. Remember, this is not a vacation, you have work to do . . so get to it !

Island Roles• Interrogator Ask questions one at a time. Keep

group moving along and on schedule. • Recorder Record any group response to each

question. • Group Make sure answers do not conflict with

one another and that they are Conscience consistent with economic plan. Ask questions to help group develop more specific responses.

• Map Specialist Keep others aware of geography and natural resources of island to help group develop a realistic economy.