Chapter 2: Economic Systems and Circular Flow of Income/Output Terri King Devin Brown

5 Economic Goals Freedom Efficiency Growth Equity Security

3 Key Economic Questions What good/services will be produced? How should these goods/services be produced? Who consumes these good/services?

#34: Economic Systems and the 5 Goals Economic SystemFree Market Economy Mixed EconomyCentrally Planned Who Answers 3 ?s IndividualsIndividuals and Government Government Role of Government NoneSmall to LargeControls ALL the Economy Goals ValuedFreedom Efficiency Growth Security All 5 Different in Difft countries Equity Security Goals Not ValuedEquityFreedom Efficiency, Growth ExamplesHong KongUS, Germany, India, Brazil North Korea, Cuba

Self Regulation of the Market: Self-Interest and Competition In the product and factor markets, the buyer and seller consider only their self-interest -Self Interest is the motivating force in free market. Households have the incentive to look for lower prices Firms have the incentive to charge the highest prices and make the most profits

Free Market and Economic Goals The free market economic system values the following economic goals: -Economic Freedom Households and firms make individual choices to participate in markets -Economic Efficiency Competition ensures efficient use of resources Firms produce only goods/services households will buy -Economic Growth Self-Interest encourages innovation Creators of new ideas will capture markets

Households / Consumers Government Firms / Producers Product Markets Factor Markets INPUT OUTPUT Consumer Spending ($) Goods & Services Bought Inputs for Production Wages, Rent, Interest and Profits Land, Labor, Capital, Entrepreneurs services Taxes ($) services Taxes ($) Revenue ($) Goods & Services Sold Circular Flow of Income and Output Factor Mkt Product Mkt

DO you get it? Since the government provides and answers the three economic questions for a centrally planned economy, do you think they have low employment or high employment? What are some examples of why a mixed economy might need the government’s assistance?