An economic system is a method used by a society to produce and distribute goods and services.

What goods and services should be produced?

****Society decides what is a society need and what is a society want.

How should these goods and services be produced?

 ****How to combine land, labor and capital to produce goods and services.

Who consumes these goods and services?

****How do we divide the goods and services?

Which system a society uses depends on that society’s goals and values.

 

1. Economic Efficiency Maximizing what you can get for resources

2. Economic Freedom The opportunity to make our own choices

3.  Economic Security/Prosperity Assuring people that goods and services

will be there when they need them

4. Economic Equity Society must decide the best way to

divide up the economic pie  5. Economic Growth/Innovation

An economy must grow for a nation to improve its standard of living

6. Others, depending on the economy Universal health care and environmental

protection

Traditional Economy Market EconomyCommand Economy/ Centrally Planned Economy

Mixed Economies

1. Traditional Economy Relies on habit, custom, rituals to

answer the what, how and who2. Market Economy

Economic decisions are made by individuals based on trade or exchange▪ Individuals decide the what, how and who▪ Higher standard of living

3. Command Economy/ Centrally Planned Economy The government decides the what, how

and who4. Mixed Economies

Market- based economic systems in which the government plays a limited role in the what, how and who

Advantages: Not much room for change Boy follows father; girl follows

mother Usually small close, communities Work for the common good not

individuals 

Disadvantages: Unable to deal with natural disasters

Resistant to change Low standard of living

Market: An arrangement that allows buyers and sellers to exchange goods and services. Markets allow us to exchange things we have

for things we need or want. Markets exist due to specialization. People

focus on producing what they are best at, and then exchange their surplus outputs.

Specialization is the concentration of efforts to produce one thing or a few things.

Each of us specializes at a specific job and uses the income to buy the products we consume.

 

  Self-sufficient communities or

households do not need markets.   Free Markets: (like the US)

Voluntary exchange of goods and services.

  (Individuals and firms answer the 3

economic questions) 

1. Household: A person or group of people living in the same residence.

 2. Firm: An organization that uses

resources to produce a product which it then sells.

 3. Profit: The financial gain made in a

transaction

4. Factor Market: Market in which firms purchase the factors of production from households.

 5. Product Market: The market in

which households purchase the goods and services that firms produce.

 

Households

Money

Goods and ServicesFirms

Product Market

Factor Market

Households

Labor, factors of production

Money

Firms

Advantages: Economic efficiency  Economic freedom  Economic growth  Consumer sovereignty

self-interest: personal gain is the motivating force in the free market

  competition: regulating force INVISIBLE HAND

(Adam Smith) incentives (negative and positive):

A hope of reward or fear of punishment that encourages a personto behave a certain way (lower prices)

CENTRALLY PLANNED ECONOMIES

Centrally planned—or command—economies operate in direct opposition to free market economies.

In command economy, the government (bureaucracy) answers the three economic questions (what, how, and for whom to produce)

CENTRALLY PLANNED ECONOMIES

The government owns land and capital, and controls labor (government decides where individuals work, how much they get paid)

Forces that drive free market, like SELF-INTEREST and COMPETITION, are absent. Consumers don’t make decisions.

SOCIALISM and COMMUNISM

SOCIALISM- social/political philosophy that argues wealth should be distributed evenly throughout a society by democratic means

SOCIALISM and COMMUNISM Socialism exists in varying degrees

throughout the world Socialists argue that real equality can

only exist if economic equality exists Public distribution of wealth is

necessary (Socialist societies can be democracies, but require economic central planning)

Government controls major industries (utilities, etc.)

COMMUNISM

A political system

COMMUNISM

Arose from socialismCentrally planned economy

(economic/political power in gov’t)Communist governments have

historically been authoritarian and have been run by single parties or dictators

MIXED ECONOMIES

Most modern economies mix both market and centrally planned systems.

The Rise of Mixed Economies: No single system has all the answers

MIXED ECONOMIES

The limits of Laissez Faire: economic philosophy that states the government generally should not intervene in the marketplace.

MIXED ECONOMIES

In theory, it was believed that the market left to its own would provide the greatest benefit for consumers and raise the standard of living.

However, government intervention became necessary because of the needs and wants of society. national defense, roads, education, mass transit worker safety and protection quality in production consumer goods governments create laws▪ protect property rights?? Right of eminent domain

(patents, copyrights) ▪ anti-trust laws: Microsoft (prevent monopolies)

MIXED ECONOMIES

The government also intervened through the 5th & 14th Amendments to American Constitution (protect life, liberty and property)

Private property is property owned by individuals or companies, not by the government or the people as a whole.

MIXED ECONOMIES

Balancing Control and FreedomSociety must assess values and

prioritize economic goalsSome goals may be better met by

the open market?Some goals must have government

action?Each nation must decide what to

give up in order to meet its goals

Government in the Factor Market

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

bureaucracy and military (2.8 million employees, 9.7 billion in wages)

Transferring Money

government collects revenue (taxes) from both households and businesses

revenue ($) is then transferred to a variety of services and products all of which need government employees to oversee▪ Military, Food and Drug Administration, FDA

needed?

▪ Biggest is social security? / $800 billion these

days?

The United States Economy Government intervention for order,

vital services and to promote the general welfare

In the political continuum of conservatives vs. liberals

a. conservatives usually want less government intervention in the market place

b. liberals usually want the general welfare of the people protected

The United States Economy

USA does have relatively few banking regulations (until now) and foreign Banks do have some restrictions

Foreign investment in the USA is

encouraged—where do you think the $800 billion came from to bail us out?????