The Three Questions all Economies must Answer. What goods and services will be produced? How will they be produced? For whom will they be produced?

Economic Systems Scarcity forces consumers/producers to make choices in regards to resources. Governments must do the same thing. How a government decides to use its resources is determine by its economic system

Economic Systems System Types Traditional Command Market

Traditional Economy Economies that are ran based on customs/traditions Example: rituals Habits Laws religious beliefs

Characteristics: Children tend to do what parents did Economic activities are centered around small units Small unit is regarded higher than the individual

Command Economy Economies that rely on the government to make all the economic decisions Individuals have no economic say Example: King/queens Pharaohs emperors

Market Economies Individuals make all of the economic choices and decisions Gov’t has no say Driving forces: self-interest - incentives

Mixed and Transitional Economies. Mixed Economy: an economic system that mixes central planning with competitive markets (the U.S. is a mixed economy). Because markets play a relatively large role, the U.S. economy is also considered a “market economy”. Gov’t accounts for 1/3 of our economy.

Mixed and Transitional Economies (Cont’d) Transitional Economy: an economy that is in the process of shifting from central planning to competitive markets. This process is also called “Privatization.”

Economic Systems Pure Market Economy: An economic system with no government involvement so that private firms account for all production. Any income derived from selling resources goes exclusively to the resource owners. Markets answer the three economic Q’s.

The Invisible Hand This simply means that resource owners in this economy have “property rights” on their resources. This means that they are free to supply those resources to the highest bidder. Producers are free to make and sell whatever they believe will be profitable for them.

Problems with Pure Market Economies They have difficulty enforcing Property Rights (there is no central authority to protect their assets). Some people have few resources to sell. Some firms try to monopolize markets.

Problems with Pure Market Economies (Cont’d) There are no public goods (no national defense). Externalities (external pollution costs)

Economic Systems (Cont’d) Pure Centrally Planned Economy: an economy where all resources are gov’t owned and all production is coordinated by the central plans of government. In theory, there is communal or public ownership of all resources.

The Visible Hand Rather than rely on competitive markets, central planners direct the allocation of resources and products. In a pure centrally planned economy the gov’t or state owns all resources, including labor. Central Planners answer the three economic questions.

Problems with Centrally Planned Economies Consumers get low priority. Little freedom of choice (gov’t planners decide where you live and where you work) Central Planning can be inefficient.

Problems with Centrally Planned Economies Resources owned by the State are sometimes wasted. Environmental Damage (state enterprises are often more concerned with meeting the goals of the central planners, ex: USSR set off 125 nuclear explosions “above” ground).