Economic SystemsEconomic SystemsChapter 2, Section 1Chapter 2, Section 1

Answering the Three Economic Answering the Three Economic QuestionsQuestions

EQ: How do different economic systems answer the three economic questions?

The Economic SystemThe Economic System

A system in A system in which the which the society society decides to decides to produce & produce & distribute distribute goods & goods & servicesservices

Economic GoalsEconomic Goals

Different societies answer the three Different societies answer the three economic questions based on the economic questions based on the importance they attach to various importance they attach to various economic goals. economic goals.

The Four Types of EconomiesThe Four Types of Economies

TraditionalTraditional

Relies on habit, Relies on habit, custom or ritual custom or ritual in answering the in answering the Three Key Econ Three Key Econ questionsquestions

FreeFree MarketMarket All decisions are made by the All decisions are made by the

individual & are based on individual & are based on exchange or tradeexchange or trade

Command /Centrally PlannedCommand /Centrally Planned

The gov’t The gov’t alone decides alone decides how to answer how to answer the Three Key the Three Key Econ Econ questionsquestions

MixedMixed

A market-based A market-based econ in which econ in which the gov’t plays a the gov’t plays a limited rolelimited role

Factor PaymentsFactor Payments Income for Income for

supplying factors of supplying factors of production.production.

Why isn’t everyone Why isn’t everyone paid the same?paid the same?

Society values Society values resources & resources & products products differently.differently.• The Doctor v. The Doctor v.

garbage mangarbage man

Safety NetsSafety Nets

Why would a Why would a gov’t create & gov’t create & provide these provide these programs?programs?

To fulfill the goal To fulfill the goal of economic of economic security and security and predictability for predictability for it’s citizensit’s citizens

Quiz?!!!!Quiz?!!!!Give One Example for Each of the Give One Example for Each of the

Following.Following.1.1. Traditional Traditional

EconomyEconomy

2.2. Command Command EconomyEconomy

3.3. Market Market EconomyEconomy

4.4. Mixed EconomyMixed Economy

1.1. AmishAmish

2.2. CubaCuba

3.3. United StatesUnited States

4.4. United StatesUnited States

Specialization & EfficiencySpecialization & Efficiency Allows one to focus on a particular Allows one to focus on a particular

task & not worry about basic task & not worry about basic needs at the same timeneeds at the same time

More efficientMore efficient

Factor market v. Product MarketFactor market v. Product Market Factor MarketFactor Market Provides goods & Provides goods &

services necessary services necessary to produce more to produce more goods & servicesgoods & services

Product MarketProduct Market Finished goods & Finished goods &

services to services to consumersconsumers

ProfitProfit A financial gain A financial gain

made in a made in a transactiontransaction

Households & Firms & the Market EconHouseholds & Firms & the Market Econ

What’s their What’s their role?role?

HouseholdHousehold• Provide factors Provide factors

of production in of production in factor market & factor market & buying power in buying power in the product the product marketmarket

Households & Firms & the Market EconHouseholds & Firms & the Market Econ

What’s their What’s their role?role?

FirmsFirms• Buyers of factors Buyers of factors

of production & of production & suppliers of suppliers of goods & servicesgoods & services

Adam Smith’s “Invisible Hand”; Its Adam Smith’s “Invisible Hand”; Its Effect on the Market PlaceEffect on the Market Place

Consumer self-Consumer self-interest & firms interest & firms competing competing naturally lead to naturally lead to an econ that an econ that consumers can consumers can buy buy goods/services goods/services at reasonable at reasonable pricesprices

The Incentive & Consumer Sovereignty The Incentive & Consumer Sovereignty RelationshipRelationship

The consumer The consumer chooses what to buy, chooses what to buy, thus exerts control thus exerts control over what is produced over what is produced by creating an by creating an incentive for firms to incentive for firms to produce the good or produce the good or serviceservice

Socialism v. CommunismSocialism v. Communism SocialismSocialism Gov’t often Gov’t often

owns major owns major industries it industries it deems vital to deems vital to the nationthe nation

Can be Can be achieved achieved through through democracydemocracy

Socialism v. CommunismSocialism v. Communism CommunismCommunism All economic & All economic &

political power is political power is controlled by the controlled by the central gov’tcentral gov’t

Often authoritarian Often authoritarian

The Authoritarian GovernmentThe Authoritarian Government What are the What are the

characteristicscharacteristics??

Strongly Strongly centralizedcentralized

Demand strict Demand strict obedienceobedience

Disallow Disallow individuals individuals freedom of freedom of judgment & judgment & actionaction

Soviet Collectives & IncentivesSoviet Collectives & Incentives Offer little Offer little

incentive incentive farmer paid a farmer paid a

set wage set wage told what to told what to

produce produce why produce why produce

more or produce more or produce efficiently?efficiently?

Soviet Heavy Industry & Soviet Heavy Industry & Opportunity CostOpportunity Cost

What did it cost?What did it cost? The Soviets The Soviets

lacked adequate lacked adequate consumer goods consumer goods and servicesand services

Quiz?!!!Quiz?!!!Which of the following would be difficult Which of the following would be difficult

to achieve in a command economy?to achieve in a command economy?1.1. Economic Economic

efficiencyefficiency

2.2. Economic security Economic security & predictability& predictability

3.3. Economic equalityEconomic equality

4.4. Economic growth Economic growth & innovation& innovation

THE ANSWERTHE ANSWER

Economic Economic efficiencyefficiency

Economic Economic growth & growth & innovationinnovation

Laissez-faireLaissez-faire

What is it?What is it? A doctrine A doctrine

that states that states that a gov’t that a gov’t should not should not intervene in intervene in the the marketplacemarketplace

Transition to Free EnterpriseTransition to Free Enterprise Some centrally Some centrally

planned planned nations are nations are shifting to free shifting to free enterprise to enterprise to keep pace with keep pace with the evolving the evolving global global economyeconomy

Privatizing and a Centrally Planned Privatizing and a Centrally Planned EconomyEconomy

Privatizing is Privatizing is slow due to slow due to there being few there being few enterprises or enterprises or businesses existbusinesses exist

No one there to No one there to take overtake over

Quiz?!!!!!Quiz?!!!!!US Free Enterprise v. Other US Free Enterprise v. Other

Economic SystemsEconomic Systems

What’s the What’s the difference?difference?

FreedomsFreedoms The individual The individual

not the gov’t not the gov’t make econ make econ decisionsdecisions