Economic SystemsEconomic Systems

3 Key Economic Questions3 Key Economic Questions

What is an economic system?

The method used by a society to produce and distribute goods and

services.

• GOODS: Physical articles that have been produced for sale or use.

– Examples: Food, Clothing, Cars

• SERVICES: Work done by someone else for which a consumer, business, or government is willing to pay.

– Examples: Teaching, Gardening, Childcare

To form an economic system, a society must answer 3 important questions...

Three Economic QuestionsThree Economic Questions

1.1. What goods will be produced?What goods will be produced?– Due to scarcity, every country must Due to scarcity, every country must

choose what to produce, therefore choose what to produce, therefore giving up the opportunity to produce giving up the opportunity to produce other goods.other goods.

– What will consumers be willing and What will consumers be willing and able to buy?able to buy?

– What price and quantity will be What price and quantity will be profitable?profitable?

Three Economic QuestionsThree Economic Questions

2. How will the goods be produced?2. How will the goods be produced?– Will production decisions be made by Will production decisions be made by

individuals or by the government?individuals or by the government?– Will producers use existing technology Will producers use existing technology

or new technology?or new technology?– Domestically or in foreign countries, Domestically or in foreign countries,

manually or using technology?manually or using technology?– The most The most efficientefficient and reasonable way and reasonable way

Three Economic QuestionsThree Economic Questions

3. For whom will the goods be 3. For whom will the goods be produced?produced?

– Will the government decide? Will price Will the government decide? Will price decide? For those who can afford and decide? For those who can afford and are willing to buy them? are willing to buy them?

– Will goods be produced for the purpose Will goods be produced for the purpose of trade with other countries?of trade with other countries?

Who Has Decision-Making PowerWho Has Decision-Making Power in Each Economic System: in Each Economic System:

Individuals, but with some government involvement.

Mixed Economy:

Central Government – officials (elected or unelected)

Centrally Planned/ Command Economy:

Individuals – Voluntary Exchange (Invisible Hand)

Market Economy:

Custom – Families & ClansTraditional Economy:

How are the 3 Key Economic Questions How are the 3 Key Economic Questions addressed in each system?addressed in each system?

2 major Economic Systems2 major Economic Systems

Free Enterprise/ Free Enterprise/ CapitalismCapitalism

individuals own individuals own most, if not all, the most, if not all, the resources and resources and control their usecontrol their use

Also called market Also called market economyeconomy

Socialism/Socialism/

Communism- Communism- government government controls and may controls and may own many of the own many of the resources.resources.

Also called command Also called command economyeconomy

Major Differences Between the Major Differences Between the 22

ResourcesResources Governments role in the EconomyGovernments role in the Economy Economic PlansEconomic Plans Income distributionIncome distribution Controlling pricesControlling prices Private propertyPrivate property

Mixed EconomyMixed Economy

A country may contain some A country may contain some characteristics of free enterprise and characteristics of free enterprise and socialismsocialism

United States is considered a free United States is considered a free enterprise nation but it also has a few enterprise nation but it also has a few features of socialism = mixed economyfeatures of socialism = mixed economy– Most resources owned by private Most resources owned by private

individualsindividuals– Government plays a role, some prices Government plays a role, some prices

controlledcontrolled

Smith-Self InterestSmith-Self Interest

-Self interest leads to good for not only -Self interest leads to good for not only individual, but others tooindividual, but others too

-”from the minute we enter this world until -”from the minute we enter this world until the day we go to our graves, we feel a the day we go to our graves, we feel a desire to make ourselves better off”.desire to make ourselves better off”.

-This leads to hard work, taking risks, and -This leads to hard work, taking risks, and benefits others through our activitiesbenefits others through our activities

-led by an -led by an “invisible hand”.“invisible hand”. Ex. butcher and baker do not give us our Ex. butcher and baker do not give us our

dinner because they love to assist us, but dinner because they love to assist us, but they can’t get what they want until they they can’t get what they want until they give us what we want.give us what we want.

The Invisible Hand of the Market The Invisible Hand of the Market EconomyEconomy

Labor Theory of Value Labor Theory of Value

Created by Karl MarxCreated by Karl Marx Def: all value of any item, is Def: all value of any item, is

determined by the necessary labor determined by the necessary labor time needed to produce that item.time needed to produce that item.

Example: If it takes 5 hours of labor Example: If it takes 5 hours of labor time to produce a chair and 10 hours time to produce a chair and 10 hours of labor to produce a table, then the of labor to produce a table, then the table is twice as valuable as the chair. table is twice as valuable as the chair.

QuestionQuestion

Why does the government provide Why does the government provide national defense and not private national defense and not private business?business?– Because not all who benefit from it Because not all who benefit from it

would be willing to pay for it. would be willing to pay for it.