Economics

Unit 2

Economic Systems

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Section 1: Types of Economics

Systems

• Nations, like you and I, must make choices

about how to use their natural, human,

capital, & entrepreneurial resources

efficiently.

• Nations, also must answer in some way

the three basic economic questions of

what, how, and for whom to produce.

Economic Systems

• Nations respond to the 3 economic

questions and the 4 factors of production

to a large degree based on their economic

systems

• The four types of economic systems are:

– Traditional

– Command

– Market

– Mixed

Mixed?

• Actually all economies today are some

form of mixed economy

• No pure traditional, command, or market

economies exist

• We simply classify them as the one they

are closest to

Traditional Economies

• Traditional economies answer the

economic questions as they have done in

the past

• Activities are based on rituals, habits,

laws, and religious beliefs developed by

their ancestors

• Traditional Economies are found in less

developed parts of he world

Traditions are passed down

• Father to son, mother to daughter

• You carry on the family traditions

Command Economies

• A Command economy relies on

government officials to answer the three

basic economic questions

• Officials or central planners have the

power to decide what products will be

made and how they will be produced

• They also decide who receives the

products once they are made

Individual Rights In Command

Economies

• Individuals have little or no say in making

economic choices

• The government maintains complete

control over the factors of production

• No “pure” command economies exist

Market Economies

• In a pure market economy, individuals

answer the three economic questions

• The government has no say

• Individuals are free to exchange goods

and services in the market

• No pure market economies exist today,

but the countries of the United States,

Germany, & Japan are very close

Compare Types of Economic

Systems

P 26

Early thoughts on Market

Economies

• Adam Smith, a Scottish economist and

philosopher wrote “An Inquiry Into the

Nature and Causes of the Wealth of

Nations” in 1776

• He believed market economies were

driven purely by self interests

• Self-interest is the impulse that

encourages people to fulfill their own

needs and wants

Self-Interests

• Some believed that self-interests would

lead to individuals ignoring the needs of

others

• Smith argued that self-interest benefits all

of society by helping the economy grow

• He said that self-interest acts as an

invisible hand that leads people to do what

is best for society even if they don’t know

that’s what they are doing

Limiting the Invisible Hand

• Smith believed that government

involvement in the economy conflicts with

self-interest and limits the “invisible hand”

to regulate the market

• Smith believed in a limited role for

government

• --Protect us from outside enemies (military)

• --Protect us from those around us who want to

harm us (police)

• --Settle disputes among us (courts)

Incentives

• An incentive is something that encourages

you to behave in a particular way

• An incentive might be in the form of a

bonus for increasing production or sales

• A negative incentive can also be used

such as a penalty for not making

production or sales quotas

Mixed Economies

• A mixed economy combines elements of

traditional, market, and command

economic models

• They are usually described by defining the

economy they are most close to

• Authoritarian socialism

• Capitalism

• Democratic socialism

Authoritarian Socialism

• These economies are also referred to as

communism

• The government owns or controls nearly

all of the factors of production

• These governments engage in long-term

planning and limits decision making power

by individuals

• North Korea, Russia & Cuba are examples

of this system

Capitalism

• In this economy, individuals own the

factors of production and answer the basic

economic questions

• Individuals can decide what to produce,

what career you pursue based on your

own interests and skills

• The United States, Canada, Mexico,

Japan, and Taiwan are capitalistic

Governments Role in Capitalism

• These governments have taxing and

spending authority

• They provide services to society such as

education, social welfare programs,

national defense, health & safety

standards in the workplace

• Private ownership and free choice are

basic to capitalism

Democratic Socialism

• The government owns some of the factors of production

• Key industries: electrical utilities, telephones,

• These are deemed to be in the “national concern”

• Individuals can influence the government ownership by electing government officials

• Sweden, Poland, & France are examples

Sec. 2: What is Free Enterprise?

• Because of the great number of economic

freedoms in the US we sometimes call our

system a free enterprise system

• Free Enterprise is a system where

business can be conducted freely with little

government intervention

• Encourages investment

• Prices tend to respond to competition

5 Features of US Free Enterprise

• Individuals have the right to …..

• 1. Own private property and enter into

contracts

• 2. Make individual choices

• 3. Engage in economic competition

• 4. Make decisions based on self-interests

• 5. Participate in the economy with limited

government involvement & regulation

Private Property & Contracts

• Goods owned by individuals and businesses

rather than the government are considered to be

private property

• Individuals & businesses can…..

– Use or dispose of property

– Buy as much as they can afford

– Sell as much as they can

– Enter into agreements (contracts), oral or written, to

buy and sell

• Contracts are legally enforceable

Individual Choice

• Laborers, producers, and consumers in the United States enjoy freedom of choice

– Pursue job opportunities of our choice

– Make whatever (legal) goods and services they want

– Buy whatever (legal) goods and services that meet our needs

Economic Rivalry

• When two or more business people make the same production choices, it leads to competition

• Competition is the economic rivalry that exists among business selling the same or similar products

• Competition encourages producers to improve existing products and to develop new ones to attract customers

Voluntary Exchange

• Producers and consumers are free to

purchase and sell when the terms of the

trade are acceptable to both parties

• The transaction is called a voluntary

exchange

• Both parties gain by the exchange (they

get what they want)

Limited Government Involvement

• Individuals, not the government, make most decisions in a market economy

• The government does have an important role….• Establishes health and safety laws

• Monitors banking practices

• Prohibits discrimination in the work place

• Provides public services like national defense, public education

• Encourages economic stability by encouraging economic growth, low unemployment, & stable prices

• The government has taxing authority to carry out it’s role

Economic Actors in Free Enterprise

• Producers

• Consumers

• Government

Producers

• Producers provide goods and services in

the market

• They combine human, natural, & capital

resources to create a product or perform a

service

• They can satisfy the needs and wants of

consumers

• Benefit others by providing jobs

Consumers

• Influence production by purchasing goods

and services

• We communicate with producers by

saying “produce more” when we buy, or

“stop producing this” when we don’t buy

• Consumers verify to producers that they

have or have not made the right decisions

about what, how, and for whom they

produce

Government

• Government plays a limited but important

role in the US free enterprise system

• It oversees and regulates the decisions of

the other economic actors (producers &

consumers) and regulates the effects of

these decisions on the economy as a

whole

Everyone is Connected

• Producers, consumers & government play

different, but connected roles in a market

system

• Resources, products, & money payments

are exchanged among economic actors in

our economy

Circular Flow Model

Shows the exchange of

resources, products, &

money payments in the

US economy (how it

works)

The green

arrows

represent the

product market

where

businesses

make goods to

sell to both

households

and

government

Gold arrows represent

the resource market.

Individuals provide

labor & resources in

exchange for income

and then pay taxes to

the government

This illustrates that

consumers, producers & the

government are dependent on

each otherp. 34

Section 3: The US Economy at

Work

• The United States has six major economic

goals

– Freedom

– Efficiency

– Equity

– Security

– Stability

– Growth

Economic Freedom

• Consumers should be able to decide how to

spend their incomes on goods and services

• Workers should be free to choose an

occupation, change jobs, or join a union

• Savers & investors are free to choose where,

when, & how to save or invest their money

• Business people are free to open new

businesses, change from one business to

another & expand or close their businesses

Economic Stability

• Enjoy full employment (the lowest possible

level of unemployment)

• The government tracks unemployment

rates which fluctuates as businesses

open/close and workers quit/get new

jobs/get laid off

• Price stability is when the overall price

level of goods and services in the

economy are relatively constant

Economic Growth

• Economic growth refers to efforts to

increase the amount of goods and

services produced by each worker in the

society

• Lower production from each worker means

that fewer goods and services are

available for each person to consume

Standard of Living

• Standard of Living refers to peoples

economic well-being

• Economists measure a nation’s standard

of living by how much an average person

in that country is able to consume in a

given period (one year)

• Standard of living improves when

production from each worker increases

faster than the total population

Economic Goals and Trade-Offs

• Goals, like wants must be evaluated to

decide which is more important at a

particular time, priorities change

• Scarcity forces individuals, businesses, &

governments to make choices among

various needs and wants

Economic Goals and Trade-Offs

• Sometimes priorities are not the same

from group to group

• Sometimes solutions for one group causes

problems for others

References

• Economics: Texas Edition: 2016. McGraw Hill Education

• Holt Economics; Texas Edition: 2003, Holt, Rinehart and

Winston