1. Ch 2 Economic systems and tools

2. Three economic Questions
What?
How?
For Whom?

3. Pure Market Economy Private firms account for production Adam Smith
Invisible hand of the Market
No Government regulation

4. Problems with market economy
Difficulty enforcing property rights
No government to enforce regulation
Some people have less
Monopolization
No public goods
Externalities- such as regulating pollution
Economic Fluctuations

5. Pure Command Economy
Central Planners
Everything State controlled

6. Problems with Command Economies
Consumers get low priority
Little Freedom of Choice
Central Planning Inefficient
Wasted Resources
Environmental Damage
No Role for Entrepreneurs

7. Mixed Economy
Market Economy
Government regulates private sector

8. Transitional and Traditional Economies
Transitional- moving from Command to Market
Traditional- adheres to customs and traditions

9. Production Possibilities Frontier
PPF Model
Resources employed efficiently
Maximum output
Focused on resources allocated to Consumer goods and capital goods (such as pizza and pizza ovens)

10. Shifts of the PPF Changes in available resources
Increase in Stock of Capital Goods
Technology Change
Improvement in Rules of the Game

11. Comparative Advantage
Absolute Advantage- produce using fewer resources
Law of Comparative Advantage- Specialization
Gains from Specialization
Exchange- Barter or Money

12. Specialization Division of Labor-
Workers specialize in a specific task
Works well with comparative advantage based on skill/ ability