ECONOMIC SYSTEMS An economic system is an organized way a society provides for the wants and needs of its people, or how a society answers the three basic economic questions.

Capitalism Capitalism is based on the theories of Adam Smith, who wrote The Wealth of Nations in Capitalism is based on the idea of laissez- faire economics.

Adam Smith is known as the “father” of capitalism and The Invisible Hand Theory.

Important beliefs include: Free enterprise (economic freedom) Freedom of choice Private property Profit motive Competition Self-interest

The US Economy The economic system in the United States is based on a capitalist or market system. Today it is known as a mixed market economy due to government regulation and oversight of the economy. In a market system, economic decisions are made by individuals. What role do patents and copyrights have in a market economy?

Circular Flow Diagram of a Mixed Economy

Other Economic Systems Traditional Economies – economic decisions are based on customs and beliefs. Family and community ties are strong.

Command Economies In command economies decisions are made by government leaders and consumer choice is often limited. Both communism and socialism are considered command, or planned, economies.

Communism Communism is based on the theories of German philosopher Karl Marx. Marx wrote The Communist Manifesto in Under communism, factors of production are collectively owned and directed by the state.

Socialism A system in which the government owns some factors of production and has a role in determining what and how goods are produced. Private property ownership is allowed to some degree. Socialism is considered less efficient than capitalism.

Most economic systems today are mixed and fall somewhere in the spectrum between pure capitalism and pure communism.

Economic Goals in the American Free Enterprise System Economic Freedom Economic Stability Economic Security Economic Equity Economic Efficiency Economic Growth Full-Employment

Economic Freedom The freedom to choose careers, make business decisions.

Economic Stability Price stability and stable growth are critical. Fiscal and Monetary Policies are used to achieve this goal.

Economic Security Protection from adverse economic events such as layoffs and illnesses.

Economic Equity Equality of opportunity and a fair distribution of wealth.

Economic Efficiency The productive use of scarce resources.

Economic Growth Sustained period during which a nation’s total output of goods and services increases.

Full Employment Full employment is the lowest possible unemployment rate, with the economy growing and all factors of production being used as efficiently as possible.