1. Chapter 2
Economic Systems

2. Answering the 3 Basic Economic Questions
Every economy is trying to find the “best” way to distribute scarce resources

3. Answering the 3 Basic Economic Questions
What goods and services will the economy produce?
How should these goods and services be produced?
Who is going to consume these goods and services?

4. Kinds of Economic Systems
Market Capitalism (a.k.a. Free Market, Free Enterprise)
Traditional
Market Democratic Socialism (a.k.a. Socialism)
Authoritarian Socialism (a.k.a. Communism)

5. Market Capitalism Individuals own resources and means of production
Basically free from government control
Adam Smith

6. Market Capitalism Goal: to motivate people through economic reward
People keep the profits from their hard work
Adam Smith

7. Market Capitalism Adam Smith Characteristics Private Property
Freedom of Choice
Self-Interest
Profit Motive
Supply and Demand
Competition
Limited Government
Adam Smith

8. Market Capitalism Examples : U.S., Australia, South Africa, Chile
Political System : Democracy
Adam Smith

9. Traditional
Economy does things as it always has

10. Traditional
Goal: to maintain the same tradition
Methods: resist new technologies

11. Traditional
Examples: the Amish in the U.S., tribes living within developed countries
Political System: Tribal Organization

12. Market Democratic Socialism
Socialism – term implying redistributing money from the rich to the poor
Government owns major means of production (ex. Transportation, Steel, Oil, etc.)

13. Market Democratic Socialism
Goal: Equal distribution of income
Methods
High Taxes
Benefits paid to low income individuals

14. Market Democratic Socialism
Examples: Norway, Mexico, Canada
Political System: Socialistic Democracy

15. Authoritarian Socialism (Communism)
Government owns all property
Total government control of the economy
Karl Marx

16. Authoritarian Socialism (Communism)
Goals: equal distribution of income with no social classes
Karl Marx

17. $1000 $10,000 I’ve made $8950! This really bites! Surplus Value $9000
$50 Pay
$1000
$10,000

18. Authoritarian Socialism (Communism)
Methods
Working class revolts against the rich owners
One political party controls all government planning
Karl Marx

19. Authoritarian Socialism (Communism)
Characteristics
Public Ownership
Centralized Decision Making
Economic Planning
Allocation by Command
Karl Marx

20. Authoritarian Socialism (Communism)
Examples: Old Soviet Union, Cuba, North Korea
Political System: Totalitarian Communism
Karl Marx

21. Authoritarian Socialism (Communism)
Key Terms from Communist Manifesto
Proletariat – the average worker who (according to Marx) is exploited by capitalism
Karl Marx

22. Authoritarian Socialism (Communism)
Key Terms from Communist Manifesto
Bourgeoisie – the rich, ruling class that uses the proletariat to make money
Karl Marx

23. Presidential Speeches
Great Moments in
Presidential Speeches

25. Free Market vs. Central Planning
Free Market Advantages
Self-Regulating – produces what is needed and wanted with no government interference
Free Market Disadvantages

26. Free Market vs. Central Planning
Free Market Advantages
This self regulating is a result of people acting on self-interest and incentives
Free Market Disadvantages

27. Free Market vs. Central Planning
Free Market Advantages
Competition holds prices to the lowest levels while spurring new invention
Free Market Disadvantages

28. Free Market vs. Central Planning
Free Market Advantages
Consumer Sovereignty – people are free to buy what they want
Free Market Disadvantages

29. Free Market vs. Central Planning
Free Market Advantages
Encourages a very high degree of economic growth
Free Market Disadvantages

30. Free Market vs. Central Planning
Free Market Advantages
Free Market Disadvantages
Economic equity and security do not occur in a purely free market

31. Free Market vs. Central Planning
Free Market Advantages
Free Market Disadvantages
Market has no incentive to build “public” goods like roads or libraries

32. Free Market vs. Central Planning
Free Market Advantages
Free Market Disadvantages
Spillover costs (negative externalities) – some problems created that effect people who didn’t cause them
Ex. - Pollution

33. Mixed Economies
Attempt to get the best out of free market and central planning
Government takes action to protect consumers when it feels it is necessary

34. For Example, in the U.S.:
FDA screens food and drug items to ensure their safety
Government breaks up harmful monopolies under the Sherman Anti-Trust Act
Government provides welfare benefits to people who cannot find a job