Economic Systems and the American Economy

What is an economic system? Economic system: The method used by a society to produce and distribute goods and services. Because resources are limited, every society must answer three economic questions…

3 basic economic questions How goods and services should be produced? Why should these goods and services be produced? Why do we produce these goods and services?

There are 4 different economic systems Traditional Economies Command Economies Market Economies Mixed Economies

Traditional Economy Economic decisions are based on customs or habits Involves traditional materials and methods High per capita GDP (population grows faster than GDP) Other issues: geography, natural resources, war, debt, and corruption

Command Economy Opposite of a market economy Major decisions are made by the government Also called socialism and communism Low per capita GDP Best examples now: Cuba and North Korea Former examples: Russia and China

Market Economy Also known as free market and capitalism Based on supply and demand Individuals own the factors of production Pure market systems rarely exist Higher per capita GDP

Mixed Economy The U.S. has this system!! Why? Because we have a mixture of market and command economies. The government’s influence is direct and indirect.

Circular Flow of the Economy

2 markets ____________ market – Businesses purchase land, hire workers, pay them for their labor, and gain a profit. (dairy factory) ______________ market – Goods and services that firms produce are purchased by households (grocery store)

Theory #1 - _______________ A free market while appearing chaotic and unrestrained is actually guided to produce the right amount and variety of goods. (supply, demand, and competition)

Theory #2 - ______________ The idea that the government should not interfere with the economy (they keep their hands off). The Invisible Hand will regulate the economy, government influence will decrease productivity.