Economic SystemsChapter 2

The Three Economic QuestionsChapter 2, Section 1

Economic Systems• Method used by society to produce & distribute

goods/services

• The economic system employed by a society depends on its goals

• To determine the goals, a society asks three key economic questions…

1 of 3 Key Economic Questions

• What to produce?

• …in order to satisfy needs and wants

(How much is devoted to defense, education, health and welfare etc…)

2 of 3 Key Economic Questions

• How should products be produced?

• Electricity

• Oil, solar, wind power?

3 of 3 Key Economic Questions• Who consumes these goods/services?

• How are goods distributed?

• How is income distributed?

• Factor payments

• income received for providing the factors of production

Economic Goals1. Efficiency

• Maximize the use of resources

2. Freedom

• Governments may or may not intervene in economic freedom

3. Security and Predictability

• Assurance that goods and services will be available

• Safety net is provided (government programs)

Economic Goals (cont.)4. Economic equity

• Fair distribution of wealth

5. Economic Growth and Innovation

• Innovation=growth=higher standard of living

6. Other goals

• Environmental protection, medical care, employment

Economic Goals Depend on Needs/Wants

• Not all goals can be met equally

• Trade-offs

• This is why there are varying economic systems

• Emphasis on different goals result in societies pursuing different economic systems

Trade-Offs• Equity

• Freedom

• Efficiency

• Security/Predictability

• Growth/Innovation

• Other Goals

Types of Economic Systems

• Traditional Economies

• Subsistence type lifestyles.

• Rely on tradition

• Little surplus

• Low Standard Of Living

• Market Economies

• Decisions are made by individuals

• Known as free markets or capitalism

Types of Economic Systems• Centrally planned

economies (command)

• Government answers the three economic questions

• Communism

• Mixed economies

• Combination of traditional, market, and centrally planned economies