Unit 3 Essential Question: Who or what decides what you get? Economic Systems Unit 3 Essential Question: Who or what decides what you get?

Who gets what? Three questions an economy must answer… What to produce? No society can produce everything (limited resources, must choose) How? 4 factors of production (hats by hand? machine?) For whom? U.S.—whoever can pay? U.S.S.R—“free” for all? (remember TINSTAAFL)

3 economic systems 1. Traditional economy Most people farm. Usually poor countries. What? – whatever they can, tradition How? – however they can, tradition For whom? – social tradition

3 economic systems (cont.) 2. Command economy These are communist nations The decisions are made by the gov’t (What? How? Who?) Started by Karl Marx & Friedrich Engels – The Communist Manifesto Idea was that capitalism exploits the workers, so… …workers should have revolution, overthrow rulers. U.S.S.R. tried communism. It failed. Very inefficient. Long lines. Few goods. No incentives to work hard.

3 economic systems (cont.) 3. Market economy (AKA capitalism) Sellers and buyers meet in a market. What?/How?/For whom? is run by the “market forces” of (a) supply and demand, & (b) competition. Free market – no one runs it, it runs itself (laissez faire). Adam Smith’s “invisible hand” guides the economy. Market forces answer: What? How? For whom? Also, you choose how to work or not. Market economies are very efficient.

Circular flow of money (simple version) 2 players: households (you and me) and firms (businesses) Households buy from firms (simply when we buy from a business) Firms “buy” from households – we sell “factors of production” (land, labor, capital) to firms & they pay wages called factor payments.

Circular flow of money, (version 2) It’s not just households and firms. The government is involved too. Gov’t buys stuff, pays wages, provides goods/services, taxes us. Key: there’s a push-pull between all three.

7 keys to U.S. economy Economic freedom – we make our own choices Competition – keeps prices low, quality up Equal opportunity – equal chance for all Binding contracts – you enter a deal…you must live up to it Property rights – if you own it, it is YOURS Profit motive – if you earn it, it is YOURS Limited government – less government is better government