Chapter 2SectionMain Menu Answering the Three Economic Questions What key economic questions must every society answer? What basic economic goals do societies have? What types of economic systems exist today?

Chapter 2SectionMain Menu Economic System An economic system is the method used by a society to produce and distribute goods and services. –Every society must answer three questions: What to produce? What should we devote to national defense, education, public health, etc… How to produce? Should electricity be produced from oil, solar power, or nuclear power For whom to produce? Who gets an education and who doesn’t, who gets a luxury car and who gets a subway pass?

Chapter 2SectionMain Menu Economic Goals Making the most of resourcesEconomic efficiency Limited gov’t interventionEconomic freedom Protected in times of economic disaster. Economic security and predictability Fair distribution of wealthEconomic equity Innovation = growth = better living.Economic growth and innovation Societies pursue additional goals.Other goals Economic Goals –Societies answer the three economic questions based on their values.

Chapter 2SectionMain Menu An economic system is the method used by a society to produce and distribute goods and services. Four Economic Systems Traditional economies rely on habit, custom, or ritual. In a centrally planned economy (command) the central government makes all decisions. In a market economy economic decisions are made by individuals and are based on exchange, or trade. Mixed economies are systems that combine tradition and the free market with limited government intervention.

Chapter 2SectionMain Menu The Free Market How do free markets operate? How can markets regulate themselves? What are the advantages of a free market economy?

Chapter 2SectionMain Menu No one produces all the goods we need and want. Market - buyers and sellers exchange goods and services. Specialization - concentration on a limited number of activities – creates efficiency. Why Do Markets Exist?

Chapter 2SectionMain Menu monetary flow physical flow monetary flow physical flow Circular Flow Diagram of a Market Economy Households Firms Product market Factor market Households pay firms for goods and services. Firms supply households with goods and services. Households supply firms with land, labor, and capital. Firms pay households for land, labor, and capital. The Free Market Economy In a free market economy, households and business firms use markets to exchange money and products.

Chapter 2SectionMain Menu The Market’s Self-Regulating Nature –In every transaction, the buyer and seller consider only their self-interest (motivating force). –Producers struggle for the dollars of consumers. This is known as competition (regulating force). –The “invisible hand of the marketplace.”

Chapter 2SectionMain Menu Market Economy Decisions are made by individuals and are based on exchange, or trade.

Chapter 2SectionMain Menu Advantages of the Free Market Economic Efficiency Responds quickly to change.Price Flexibility Economic Growth Competition encourages innovation and growth – entrepreneurs. Economic Freedom Producers and consumers do what they want – what is in their own self-interest Private Property Individuals have property rights

Chapter 2SectionMain Menu Weakness of the Free Market Economic Equity & Security –Rewards only productive resources –Free Riders – Don’t want to pay, but will consume –Public Goods – Some pay but don’t use

Chapter 2SectionMain Menu Centrally Planned Economies –How are centrally planned economies organized? –What problems exist within centrally planned economies?

Chapter 2SectionMain Menu Centrally Planned (Command) Economy The central government makes all decisions. Hu Jintao Fidel Castro – now Raul Castro Kim Jong-un

Chapter 2SectionMain Menu Current Communist Countries Presently these countries have one set of central planners in power. China, Cuba, Laos, North Korea, Vietnam Although different in each country, each practices a form of socialism/communism.

Chapter 2SectionMain Menu The government owns land, labor and capital and decides for who, how and what to produce. Socialism - democratic means should be used to distribute wealth evenly throughout a society. Communism - economy where all economic and political power rests in the hands of the government. Classless society Organization of Centrally Planned Economies

Chapter 2SectionMain Menu Problems of a Centrally Planned Economy Does not meet wants and needs of individuals Lack of incentive New ideas discouraged Little flexibility

Chapter 2SectionMain Menu Potential Positives of Communism/Socialism People are considered equal Every citizen can have/keep a job No competition for jobs/property/additional private resources

Chapter 2SectionMain Menu Modern Economies Why are many modern economies mixed economies? What role does the government play in a mixed economy? How do mixed economies in different countries compare? What role does free enterprise play in the United States economy?

Chapter 2SectionMain Menu Market economies, with all their advantages, have certain drawbacks. The Rise of Mixed Economies Limits of Laissez Faire Laissez faire is the doctrine that government generally should not interfere in the marketplace. Governments create laws protecting property rights and enforcing contracts. Encourages innovation.

Chapter 2SectionMain Menu monetary flow physical flow monetary flow physical flow Circular Flow Diagram of a Mixed Economy Households Firms Product market Factor market Government expenditures government- owned factors taxes government purchases Government’s Role in a Mixed Economy The government purchases land, labor, and capital from households in the factor market. Federal Govt. – 2.8 million employees, 16 billion a year State Govt. – 3.7 million employees, 19 billion a year Purchases goods and services in the product market.

Chapter 2SectionMain Menu Mixed Economy

Chapter 2SectionMain Menu

Chapter 2SectionMain Menu Continuum of Mixed Economies Centrally plannedFree market Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick Iran North Korea Cuba China RussiaGreecePeruUnited States South AfricaFranceUnited Kingdom BotswanaCanadaSingapore Hong Kong Comparing Mixed Economies An economic system that permits the conduct of business with minimal government intervention is called free enterprise.

Chapter 2SectionMain Menu Want to connect to the PHSchool.com link for this section? Click Here!Click Here! Section 4 Assessment 1. The United States economy is a mixed economy (a) based on the principle of a traditional economy, but allows some government intervention. (b) based on the principles of a centrally planned economy, with limited government intervention. (c) based on the principles of the free market, and allows no government intervention. (d) based on the principles of the free market, but allows some government intervention. 2. Government intervention in a modern economy is useful because (a) the needs and wants of modern society are always met by the marketplace. (b)the marketplace has many incentives to create public goods such as parks and libraries. (c)governments are able to provide some goods and services that the marketplace has no incentive to produce. (d) the marketplace provides all of its own laws.

Chapter 2SectionMain Menu Want to connect to the PHSchool.com link for this section? Click Here!Click Here! Section 4 Assessment 1. The United States economy is a mixed economy (a) based on the principle of a traditional economy, but allows some government intervention. (b) based on the principles of a centrally planned economy, with limited government intervention. (c) based on the principles of the free market, and allows no government intervention. (d) based on the principles of the free market, but allows some government intervention. 2. Government intervention in a modern economy is useful because (a) the needs and wants of modern society are always met by the marketplace. (b)the marketplace has many incentives to create public goods such as parks and libraries. (c)governments are able to provide some goods and services that the marketplace has no incentive to produce. (d) the marketplace provides all of its own laws.