1. 1

3. Economic Systems 1. Traditional Economy 2. Free Market Economy
3. Command (Centrally Planned)Economy
4. Mixed Economy 3

4. An economic system is a method used by a society to produce and distribute goods and services.4

5. Economic Systems.
A society’s values, such as freedom or tradition, guide the type of economic system that society will have.

6. Three Economic Questions:
1 What goods and services should be produced? **Each society must decide what to produce in order to satisfy its needs and wants.

7. 2. How should these goods and services be produced?
**How to use a society's resources (combine land, labor and capital) to produce goods and services.
Should a society produce electricity with oil, solar power or nuclear power? 7

8. Three Economic Questions
3. For whom should these goods and services be produced?
**How do we divide the goods and services?
Who gets to drive a Bentley and who gets a subway pass?
This is determined by how societies distribute income. 8

9. Society's Goals and Values
1. Economic Efficiency
Maximizing what you can get for resources
2. Economic Freedom
Making economic choices
3.  Economic Security/Prosperity
Assuring goods and services will be there when needed 9

10. 5. Economic Growth/Innovation 6. Other: (depending on the economy)
4. Economic Equity
Who gets what resources?
5. Economic Growth/Innovation
6. Other: (depending on the economy)
EX. Universal health care and environmental protection 10

11. 1. Traditional Economy The oldest and simplest economic system.
Rely on habit, custom, or ritual: family-based
Members of these societies work to support the
Entire community.
Often lack modern conveniences and have a
relatively Low standard of living.
They meet their own needs. 11

12. Traditional Economy con't
1. What to produce? People follow their customs and traditions. 2. How to produce goods & services? People grow & make things the same way that their ancestors did based on customs and traditions 3. For Whom to produce? People in the village who need them.

13. 2. Free Market Economy
An economic system in which production and distribution questions are answered by supply and demand
Most of the resources are owned by private citizens
Economic decisions based on Free Enterprise
(competition between companies)
Laissez-Faire: NO government interference at all !!
No laws to protect workers form unfair bosses
Pure Capitalism!!

14. self-interest: personal gain is the
motivating force in the free market
competition: regulating force
INVISIBLE HAND
(Adam Smith)
incentives (negative and positive):
A hope of reward or fear of
punishment that encourages a person
to behave a certain way (lower prices) 14

16. 3. Command/Planned Economy
Command—or —Centrally planned economies operate in direct opposition to free market economies.

17. Command/Planned Economy
The government owns land and capital, and controls labor (government decides where individuals work, how much they get paid)
Forces that drive free market, like SELF-INTEREST
and COMPETITION, are absent.
Consumers don’t make decisions.

19. 4. MIXED ECONOMY
Mixed Economy: An economic system that features characteristics of both free market and command economic systems
A mixed economic system allows a level of private
economic freedom but also allows for govt's to interfere in
economic activities in order to achieve social aims.
Most modern economies mix both market and centrally planned systems.
Japan
North Korea
New Zealand

20. MIXED ECONOMIES Balancing Control and Freedom
Society must assess values and prioritize economic goals
Some goals may be better met by the open market?
Some goals must have government action?
Each nation must decide what to give up in order to meet its goals

22. US MIXED ECONOMY
In theory, it was believed that the U.S. market left to its own would provide the greatest benefit for consumers and raise the standard of living. (Laissez-Faire)
However, government intervention became necessary because of the needs and wants of society.
national defense, roads, education, mass transit
worker safety and protection
quality in production consumer goods
governments create laws
protect property rights?? (patents, copyrights)
anti-trust laws: Microsoft (prevent monopolies)

23. The United States Economy
Government intervention for order, vital services and to promote the general welfare
In the political continuum of conservatives vs. liberals
Conservatives usually want less government intervention in the market place
Liberals usually want the bigger/more government

25. 3. Profit: The financial gain made in a transaction
1. Household: A person or group of people living in the same residence.
2. Firm: An organization that uses resources to produce a product which it then sells.
3. Profit: The financial gain made in a transaction 25

26. 4. Factor Market: Market in which firms purchase the factors of production from households.
5. Product Market: The market in which households purchase the goods and services that firms produce. 26

27. Government in the Factor Market
like businesses government purchases land, labor and capital from households in the factor market
bureaucracy and military (2.8 million employees, 9.7 billion in wages)

28. Transferring Money
government collects revenue (taxes) from both households and businesses
revenue ($) is then transferred to a variety of services and products all of which need government employees to oversee
Military, Food and Drug Administration, FDA needed?
Biggest is social security? / $800 billion these days?

29. The United States Economy
USA does have relatively few banking regulations (until now) and foreign Banks do have some restrictions
Foreign investment in the USA is encouraged—where do you think the $800 billion came from to bail us out?????