Chapter 2: Economic Systems and Tools Section 2.1 Economic Questions and Systems (33)

The Three Economic Questions All economies must answer 3 questions : What __________ and _____________ will be produced? _____________ will they be produced? __________________ will they be produced?

The Three Economic Questions (continued) Some standards used to distinguish among economic systems are: __________ owns the resources. What decision-making process is used to _________________resources and products. What types of ____________________ guide economic decision makers.

There is no _____________ involvement at all. Pure Market Economy In a pure market economy _____________ firms account for all production. There is no _____________ involvement at all. Features of this economic system include. the _______________ ownership of all resources, and the coordination of economic activity based on the prices generated in free, _________________ markets. Any ___________________ derived from selling resources goes exclusively to the resource owners.

The Invisible Hand of Markets According to __________ ____________market forces coordinate production as if by an “invisible hand.” Smith argued that although each individual pursues his or her self-interest the “invisible hand” of market competition promotes the _________________________. _____________________ choices in competitive markets answer the questions what, how and for whom.

Problems with Pure Market Economies The most notable market failures include: Difficulty enforcing ________________ rights In a pure market economy, there is no government, so there is no central authority to ________________ property rights, enforce contracts, and otherwise ensure that the rules of the game are followed Some people have few ________________ to sell Because markets do not guarantee even a minimum level of _____________________, some people would have difficulty surviving

Problems with Pure Market Economies (cont’d) Some firms try to ___________________ markets Despite the theory of the “invisible hand” some producers may try to monopolize the market by either unfairly driving out ________________ or by conspiring with competitors to increase prices No __________________ goods _________________________ firms do not produce so-called public goods such as national defense. Say: Today we have antitrust and unfair competition laws which protect competitors, however if we were a pure market economy law would not come into play No government too limited protection no gtys (not sure if that is the word)

Problems with Pure Market Economies (cont’d) Externalities ______________________ reflect the benefits to buyers and the cost to sellers Some production and consumption affect ____________ – those not directly involved Private markets _______________ to account for externalities Because of this type of market failure, even market economies allow a role for _________________________. For example, because pollution costs are outside - or external to – the market transaction, they are called externalities

Pure Command Economy In a pure command economy, all resources are _____________________________and production is coordinated by the central plans of government ________________. In theory, there is public, or __________________, ownership of all resources. A command economy is sometimes called _________________. ______________________ answer the 3 economic questions by spelling out how many missiles, how many homes and how much bread to produce. Central planners also decide ________________________ these goods and who should get them. Cirr point As Americans we can not even imagine this Market point re: environment In a pure command economy the central authority or state controls all resources including labor Central planners direct production through state-run enterprises, which usually face no competition. Some goods and services are rationed meaning that each household gets a certain amount. For example, each house gets so many feet of living space. Other products are allocated based on prices set by central planners. Prices, once set, tend to be inflexible What does that leave the door open for? corruption by those in charge

Problems with Command Economies __________________________get low priority ___________________ freedom of choice. Central planning can be _________________ – the former Soviet Union had a command economy. Resources owned by the central authority are sometimes wasted – nobody has an _______________________ to see that resources are employed in their highest-valued use. Environmental Damage in theory command economy should take better care of the environment than a market economy – common good; directors of state enterprises are often more concerned with meeting ____________________ goals set by central planners Central Planners No experts - too broadly focused .

Mixed Transitional and Traditional Economies No country represents either a market economy or a command economy in its pure sense! Most economies now mix central planning with competitive markets and are called ______________________________.

Mixed Economy The United States is a mixed economy - it is also considered a ________________ economy because markets play a relatively large role Government accounts for about ________________ of all U.S. economic activity Government also _______________________ the U.S. private sector in a variety of ways Federal bodies regulate workplace safety, environmental quality, competition in markets, and many other activities. Although it is not pure, a focus of the economy in the US is on free markets, hence the name market economy.

More than two dozen countries are transitional economies Transitional Economy An economic system in the process of shifting from __________________ planning to _________________ markets. More than two dozen countries are transitional economies The transition involves converting government enterprises into private enterprises – a process called ____________________. – in the process of shifting orientation from command to market economies

Traditional Economy An economic systems shaped largely by ___________________or religion; examples: India - _______________ system restricts occupational choice Charging interest is __________________ under Islamic law ________________ relations also play significant roles in organizing and coordinating economic activity