ECONOMIC SYSTEMS

WHAT IS AN ECONOMIC SYSTEM? Economic system: the structure a society uses to produce and distribute goods and services.

THREE ECONOMIC QUESTIONS Every economic system can be determined by how it answers the three basic economic questions: 1.What should be produced? 2.How should it be produced? 3.For whom to produce? The answers to these questions depend on how society distributes income.

COMBINING FACTOR RESOURCES

THREE ECONOMIC QUESTIONS As a result of scarce resources, societies must answer three key economic questions: What goods and services should be produced? How should these goods and services be produced? Who consumes these goods and services? How a society answers these three questions defines the type of economic system that society has.

What goods and services should be produced? What to produce in order to satisfy the needs and wants of its people. Because resources are limited, each decision that a society makes about what to produce comes at an opportunity cost. How should goods and services be produced? Societies must consider most efficient and best use of its land, labor, and capital.

Who consumes goods and services? Determined by how societies distribute income. Through factor payments, including profits, societies can determine who will be the consumers of the goods and services produced.

THE FOUR ECONOMIC SYSTEMS

TRADITIONAL ECONOMY Relies on habit, custom, or ritual to decide questions of consumption & production of goods & services. INUITS

(FREE) MARKET ECONOMY A Free Market economy is an economic system where answers to the 3 economic questions are based on the principle of voluntary exchange. Voluntary Exchange is a transfer of goods, services, or ideas that someone makes willingly.

(FREE) MARKET ECONOMY VOCABULARY Capitalism: free market system based on voluntary exchange. Example: The United States Market - place that allows buyers and sellers to exchange things. Specialization - when individuals and businesses do only what they do best. It makes an economy more efficient.

FREE MARKET ECONOMY VOCABULARY (CONT’D) Self-interest – a person’s own personal gain. Competition - the contest between firms or people to sell goods or services.

FREE MARKET ECONOMY VOCABULARY Adam Smith - wrote The Wealth of Nations - an economy is made up of exchanges in which the buyer and seller only consider what is best for themselves. The Invisible Hand - states competition controls the marketplace. Laissez Faire - idea that government should not get involved in economic matters.

FREE ENTERPRISE system in which individuals, not the government, make investment decisions.

FREE MARKET ECONOMY VOCABULARY (CONT’D) Consumer Sovereignty - the power of consumers to decide what gets produced.

COMMAND ECONOMIES A Command Economy is a centrally planned economy. Government owns land and capital and has a group of planners that makes decisions about how resources are used. 3 economic questions are answered by the government

CUBA North Korea Command Economies

COMMAND ECONOMY VOCABULARY Socialism – government owns factors means of production Communism - government owns ALL property and controls ALL resources. Authoritarian - severely limits the rights of the citizens.

WHAT ARE DISADVANTAGES OF A COMMAND ECONOMY? Efficiency – the government owns factors of production, so workers have little incentive to work hard….wages are fixed. Lack of Freedom – command societies value the good of society over individual freedom. Slow Growth – Very little innovation. No incentive to grow. Equity – Major goal of communism is equity but in reality the people in control have choices but common man does not.

MIXED ECONOMY Most modern economies are mixed Which means a market-based system in which the government has SOME involvement.

WHY DO WE HAVE MIXED ECONOMIES? Pure forms of market and command economies do not exist. Most economies have some blend of command and market. The degree (amount) of government varies from nation to nation. Nations believe that SOME government is good..such as national defense and transportation.

HOW CAN WE COMPARE MIXED ECONOMIES? CONTINUUM- a continued series of items in a line with no distinct division between them. Mostly command economies with heavy government involvement: North Korea, China, Cuba Mostly market economies with little government involvement: Hong Kong, United Kingdom, USA

ECONOMIC GOALS AND VALUES The goals and values of a society affect how a society answers the key economic questions.

INTRODUCTION What goals and values affect how a society answers the key economic questions? Each society is guided by its economic system, which affects the way in which it does business within the society itself and with other societies. A society’s values, such as freedom or tradition, guide the type of economic system that society will have.

6 BROAD ECONOMIC GOALS 1.GROWTH AND INNOVATION 2.EFFICIENCY 3.FREEDOM 4.SECURITY 5.EQUITY 6.STABILITY

1. ECONOMIC GROWTH AND INNOVATION A society needs economic growth and innovation. A nation’s economy must grow so it can provide jobs for the new people joining the workforce. A nation strives to improve its standards of living. Innovation is important for economic success as well.

2. ECONOMIC EFFICIENCY Resources are scarce - Must be used wisely (efficiency) Wasted goods = less needs satisfied Try to maximize what they produce using the scarce resources they have

3. ECONOMIC FREEDOM Some societies limit the economic freedoms of its people. Economic freedom = consumer sovereignty In the United States, Americans face some limitations but, in general, we enjoy a large amount of economic freedom.

4. ECONOMIC SECURITY Economic systems also strive to achieve a certain degree of economic security. Economic systems try to reassure people that goods and services will be available when needed and they can count on receiving expected payments on time. Safety Net – set of programs to protect people during hard times – an example is: unemployment insurance.

5. ECONOMIC EQUITY Economic equity is another economic goal that is defined differently in different societies. Equity=Equality Each society must decide how to divide its economic pie.

6. STABILITY Why is stability important? So people feel safe and will invest in the economy which leads to growth…and stability.

ECONOMIC GOALS IN CONFLICT There are some additional economic goals for certain societies, including environmental protection, full employment, and protecting national industries. All societies must prioritize their economic goals, or arrange them in order of importance. Each choice comes with some kind of trade-off.