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Economic Systems Chapter 2, Section 1
Answering the Three Economic Questions EQ: How do different economic systems answer the three economic questions?
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The Economic System A system in which the society decides to produce & distribute goods & services
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3 Economic Questions How to produce What to produce
For whom to produce
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Economic Goals Different societies answer the three economic questions based on the importance they attach to various economic goals.
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The Four Types of Economies
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Traditional Relies on habit, custom or ritual in answering the Three Key Econ questions
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Free Market All decisions are made by the individual & are based on exchange or trade
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Command /Centrally Planned
The gov’t alone decides how to answer the Three Key Econ questions
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Mixed A market-based econ in which the gov’t plays a limited role
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How do they differ? In the way each system answers the production and distribution questions
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Factor Payments Income for supplying factors of production.
Why isn’t everyone paid the same? Society values resources & products differently. The Doctor v. garbage man
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Safety Nets Why would a gov’t create & provide these programs?
To fulfill the goal of economic security and predictability for it’s citizens
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1. For whom is this good produced?
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Quiz?!!!! Give One Example for Each of the Following.
Traditional Economy Command Economy Market Economy Mixed Economy Amish Cuba United States
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Economic Systems Chapter 2
The Free Market Economy Section 2 EQ: What are the two markets within a free market economy?
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Specialization & Efficiency
Allows one to focus on a particular task & not worry about basic needs at the same time More efficient
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Factor market v. Product Market
Provides goods & services necessary to produce more goods & services Product Market Finished goods & services to consumers
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Profit A financial gain made in a transaction
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Households & Firms & the Market Econ
What’s their role? Household Provide factors of production in factor market & buying power in the product market
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Households & Firms & the Market Econ
What’s their role? Firms Buyers of factors of production & suppliers of goods & services
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The Benefit of Competition
Competition means firms produce goods/services of high quality & sell at low prices
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Adam Smith’s “Invisible Hand”; Its Effect on the Market Place
Consumer self-interest & firms competing naturally lead to an econ that consumers can buy goods/services at reasonable prices
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The Incentive & Consumer Sovereignty Relationship
The consumer chooses what to buy, thus exerts control over what is produced by creating an incentive for firms to produce the good or service
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Quiz?!!!
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Economic Systems Chapter 2
Centrally Planned Economies Section 3
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Socialism v. Communism Socialism
Gov’t often owns major industries it deems vital to the nation Can be achieved through democracy
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Socialism v. Communism Communism
All economic & political power is controlled by the central gov’t Often authoritarian
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The Authoritarian Government
What are the characteristics? Strongly centralized Demand strict obedience Disallow individuals freedom of judgment & action
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Soviet Collectives & Incentives
Offer little incentive farmer paid a set wage told what to produce why produce more or produce efficiently?
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Soviet Heavy Industry & Opportunity Cost
What did it cost? The Soviets lacked adequate consumer goods and services
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Quiz?!!! Which of the following would be difficult to achieve in a command economy?
Economic efficiency Economic security & predictability Economic equality Economic growth & innovation THE ANSWER Economic efficiency Economic growth & innovation
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Economic Systems Chapter 2
Modern Economies Section 4 3 Slides
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Laissez-faire What is it?
A doctrine that states that a gov’t should not intervene in the marketplace
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Transition to Free Enterprise
Some centrally planned nations are shifting to free enterprise to keep pace with the evolving global economy
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Privatizing and a Centrally Planned Economy
Privatizing is slow due to there being few enterprises or businesses exist No one there to take over
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Quiz?!!!!! US Free Enterprise v. Other Economic Systems
What’s the difference? Freedoms The individual not the gov’t make econ decisions
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