1. Economic Systems
August 19, 2008

2. Economic System
A method used by societies to distribute goods and services
Distribution depends on that society’s goals and values

3. 3 Key Economic Questions?
What goods and services should be produced
How should these goods and services be produced
Who consumes these goods and services ? ? ? ? ? ? ? ? ?

4. FACTOR PAYMENTS
Income people receive for supplying the factors of production

5. Economic Goals and Values
Economic Efficiency
Economic Freedom
Economic Security and Predictability
Economic Equity
Economic Growth and Innovation

6. Centrally Planned & Modern Economies

7. How is a command economy organized?
The central government answers the 3 key economic questions
The government controls the factors of production as well
Self-interest, competition, and consumer sovereignty are missing

8. Socialism vs. Communism
Coach Ramsey
Rules !!!!
Socialism  social and political philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout a society
Communism  political system characterized by a centrally planned economy with all economic and political power belonging to the central government

9. Advantages and Disadvantages
Guarantees jobs and income; jumpstarts certain industries; can fulfill some production goals
Disadvantages:
Can’t meet consumer needs & wants; workers lack incentives; no innovation; no flexibility; poor quality of goods; shortages
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10. Modern Economies
Most economies today are mixed economies  have elements of both free market and centrally planned economies
There are limitations to laissez faire

11. Comparing Mixed Economies
Free enterprise – economic system characterized by private or corporate ownership of capital goods
Many economies today are in transition from centrally planned to market based
To make this transition, state firms must be privatized

12. The Free Market

13. What is a market?
An arrangement that allows buyers and sellers to exchange things
We have markets due to specialization

14. Free Market Economy A FME is based on voluntary exchanges in markets
In a FME, individuals and businesses own the Factors of Productions

15. Households & Firms
HH  person, or group of people living in the same residence
HH own the factors of production
Firms  an organization that uses resources to produce a product, which it then sells
Transform “inputs”  into “outputs”

16. Factor Market & Product Market
The Factor Market is where firms purchase FOP from households
The Product Market shows households purchasing goods & services from firms
Circular Flow Model of an Economy

17. Firms Product Market Factor Market Monetary Flow Physical Flow
Households
Physical Flow
Monetary Flow
Factor Market

18. Adam Smith Wrote The Wealth of Nations, 1776
Argued competition and our self-interest would keep the marketplace functioning
The “invisible hand”

20. Happy Halloween