Chapter 2Chapter 2

Economic SystemsEconomic Systems Economic systems – way nations

determine how to use resources All economic systems answer

three basic questions: what to produce, how to produce, and for whom to produce.

What Should be What Should be Produced?Produced?What is an example of a company

that stopped producing one item so it could devote more resources to producing a different item?

Other examples◦Gov’t decides to build new roads

which means fewer resources to maintain nat’l parks

How Should it be How Should it be Produced?Produced?Then must decide best

combination of inputs to produce the good/service◦Laborers (skilled or unskilled)◦Use capital goods to produce which

will limit labor needed?

For Whom Should it be For Whom Should it be Produced?Produced?Our economic system we live in

determines how goods/services are distributed

In US most g/s are distributed to individuals and business through the price system

Other countries might… majority rule, lottery, first-come/first-serve, equally or military force

Types of Economic Types of Economic SystemsSystems

• How answer basic questions determine which system

• Keep in mind… there is no PURE system

(Controlled)

(Capitalism)

TraditionalTraditionalEconomic decisions based on

customs/beliefs from previous generationsAdvantages

◦ Know what is expected & family/community ties strong

Disadvantages◦ Change is discouraged and possibly punished◦ Methods of production insufficient

Democratic Republic of the Congo in central Africa,& Aboringines of Australia

Command (Controlled)Command (Controlled)Government makes all decisions

regarding the factors of production◦Paid according to central planners◦Can’t choose your career

Disadvantages◦No incentive to work hard or

effieciently◦Less consumer choices

North Korea, parts of the People’s Republic of China

Market (Capitalism)Market (Capitalism)Individuals own the factors of

production and make decisions to better their family’s

Market – freely exchanging g/s between buyers & sellers

Prices signal what is bought/sold◦High (scarce) or low (abundant)

Circular Flow ChartCircular Flow Chart(indicates how market system works)(indicates how market system works)

Market Market Advantages

◦Choose career◦Spend how you wish◦Own property◦Take risks and earn profit

One disadvantage◦Fear survival of young, old, disables

w/out help from government

MixedMixedCombines pure market and

command to form a systemMost countries haveIndividuals can own property and

make decisions but have government regulations to follow

Who controls factors of Who controls factors of production for each system?production for each system?

(Customs/Beliefs)

(Private individuals)(individuals & gov’t)

(Government)

The American economy is defined by six basic characteristics.

Limited Role of Gov’tLimited Role of Gov’tMarket System (Capitalism)Pure Capitalism referred to

laissez-faire (let people do as they choose w/out gov’t)

In US, individuals own factors of production but use w/in legislated limits

Limited Role of Gov’tLimited Role of Gov’tAt first gov’t limited to nat’l

defense and keeping peaceNow..

◦Regulate quality of foods & drugs◦Watch over money/banking system◦Inspect workplaces for hazardous

conditions◦Protect environment◦Tax revenues to support SS &

Medicare

Freedom on EntrerpriseFreedom on EntrerpriseUS also known as free-enterprise

system◦Economic system in which individuals

own factors of production & decide how to use them

Want to start a business?◦You can. Might be successful or might

fail.Gov’t has legal restrictions

◦Zoning regulations, child labor laws, etc.

Freedom of ChoiceFreedom of ChoiceBuyers (not sellers) choose what

should be producedSometimes gov’t intervenes..

◦Safety standards on toys, cars◦Public utilities (gov’t might regulate

prices)

Profit IncentiveProfit IncentiveProfit is amount left after all

costs of production have been paid

Profit Incentive is the desire to make a profit

Profits & losses lead to economy that is more efficient and continually growing

CompetitionCompetitionProfits encourages competitionCompetition is rivalry among

producers/sellers of similar g/s to win more business

Competition leads to efficient use of resources

Private PropertyPrivate PropertyAs long as have money, you can

buy land, car, business, etc.Also control how, when & by

whom uses your property

Goals of Free EnterpriseGoals of Free EnterpriseUS has a free enterprise

(capitalist) systemGoals are…

◦Freedom◦Efficiency◦Equity◦Security◦Stability◦Growth

FreedomFreedomWe have one of the highest

degrees of freedom◦Start business◦Own private property◦Make decisions in marketplace

Economic EfficiencyEconomic EfficiencyEconomic efficiency is wise use

of available resources to obtain the greatest benefits

B/c of scarcity, must be careful to not waste and produce goods at low costs

Economic EquityEconomic EquityAttempt to balance economic

policy so everyone benefits fairlyEncourage policy makers to pass

laws..◦Equal pay for equal work◦Fair hiring practices

Economic SecurityEconomic SecurityProtection against risks beyond

our controlOur system provides security

through a number of government social programs◦Accidents on job◦Natural disasters◦Old age

Economic StabilityEconomic StabilityGoal is to reduce extreme ups

and downs in standard of livingStandard of Living is how well we

live◦Measure by value of g/s used in

given time period◦ US has more individuals enjoying a high standard of living than

almost anywhere else in world

Economic GrowthEconomic GrowthEconomic Growth is expansion of

the economy to produces more goods, jobs & wealth

Rights & Responsibility of Rights & Responsibility of F.E.F.E.Have many rights

◦Choose, career, work little or a lotResponsibilities

◦Support family◦Electing gov’t officials

Pure Command SocialismPure Command SocialismType of Command/Controlled

Economic SystemThere is little private property

and the state owns the factors of production

Most extensively controlled economies today are North Korea and Cuba

Pure Socialism Pure Socialism CharacteristicsCharacteristicsPrices set by stateMovement of resources (particularly

labor) strictly controlledState owns factors of productionIndividual risk taking is not allowedEconomic decisions (3 ?’s) made by

state officialsTaxation is often used to

redistribute income

Benefits of CapitalismBenefits of CapitalismEconomic efficiencyIndividual freedom

Disadvantages of Disadvantages of CapitalismCapitalismCritics say…Income is unequally distributedNot enough schools and

museums for general public

Benefits of CapitalismBenefits of CapitalismEconomic efficiencyIndividual freedom

Disadvantages of Disadvantages of CapitalismCapitalismCritics say…

Income is unequally distributedNot enough schools and

museums for general public