1. Chapter 3 Essential Question: Who or what decides what you get?
Economic Systems
Chapter 3
Essential Question:
Who or what decides what you get?

2. Who gets what? Three questions an economy must answer…
What to produce?
No society can produce everything (limited resources, must choose)
How?
4 factors of production (hats by hand? machine?)
For whom?
U.S.—whoever can pay? U.S.S.R—“free” for all? (TINSTAAFL)

3. 3 economic systems 1. Traditional economy
Most people farm. Usually poor countries.
What? – whatever they can, tradition
How? – however they can, tradition
For whom? – social tradition

4. 3 economic systems (cont.)
2. Command economy
These are communist nations
The decisions are made by the gov’t (What? How? Who?)
Started by Karl Marx & Friedrich Engels – The Communist Manifesto
Idea was that capitalism exploits the workers, so…
…workers should have revolution, overthrow rulers.
U.S.S.R. tried communism. It failed.
Very inefficient. Long lines. Few goods. No incentives to work hard.

6. 3 economic systems (cont.)
3. Market economy (AKA capitalism)
This is the U.S.
It’s run by “market forces” of supply and demand, competition.
Sellers will supply whatever the buyers demand. The two reach a price together.
Free market – no one runs it, it runs itself (laissez faire).
Market forces are Adam Smith’s “invisible hand” that guides the economy. They answer the what, how, for whom?
Also, you choose how to work or not.
Market economies are very efficient.

7. Circular flow of money (simple version)
2 players: households (you and me) and firms (businesses)
Households buy from firms – simply when we buy from a biz
Firms “buy” from households – we sell “factors of production” (land, labor, capital) to firms, they pay (such as wages for labor) called factor payments

8. Circular flow of money, (version 2)
It’s not just households and firms. The government is involved too.
Gov’t buys, pays wages, provides goods/services, taxes.
Key: there’s a push-pull between all three.

9. 7 keys to U.S. economy Economic freedom – we make our own choices
Competition – keeps prices low, quality up
Equal opportunity – equal chance for all
Binding contracts – you enter a deal…you must live up to it
Property rights – if you own it, it is YOURS
Profit motive – if you earn it, it is YOURS
Limited government – less government is better government