1. Economic Systems and the American Economy

2. What is an economic system?
Economic system: The method used by a society to produce and distribute goods and services.
Because resources are limited, every society must answer three economic questions…

3. 3 basic economic questions
How goods and services should be produced?
Why should these goods and services be produced?
Why do we produce these goods and services?

4. There are 4 different economic systems
Traditional Economies
Command Economies
Market Economies
Mixed Economies

6. Traditional Economy Economic decisions are based on customs or habits
Involves traditional materials and methods
High per capita GDP (population grows faster than GDP)
Other issues: geography, natural resources, war, debt, and corruption

8. Command Economy Opposite of a market economy
Major decisions are made by the government
Also called socialism and communism
Low per capita GDP
Best examples now: Cuba and North Korea
Former examples: Russia and China

10. Market Economy Also known as free market and capitalism
Based on supply and demand
Individuals own the factors of production
Pure market systems rarely exist
Higher per capita GDP

12. Mixed Economy The U.S. has this system!!
Why? Because we have a mixture of market and command economies.
The government’s influence is direct and indirect.

14. Circular Flow of the Economy

15. 2 markets
____________ market – Businesses purchase land, hire workers, pay them for their labor, and gain a profit. (dairy factory)
______________ market – Goods and services that firms produce are purchased by households (grocery store)

16. Theory #1 - _______________
A free market while appearing chaotic and unrestrained is actually guided to produce the right amount and variety of goods. (supply, demand, and competition)

17. Theory #2 - ______________
The idea that the government should not interfere with the economy (they keep their hands off). The Invisible Hand will regulate the economy, government influence will decrease productivity.