CHAPTER-2

ECONOMIC SYSTEMS

TYPES OF ECONOMIC SYSTEMS

Traditional Economies – the allocation of scarce resources, and nearly all other economic activity, stems from ritual, habit or custom.

Command Economies – are economies in

which a central authority makes most of

WHAT, HOW, and FOR WHOM decisions.

Economic decisions are made by the

government.

Market Economies – People and firms act

in their own best interests to answer the

WHAT, HOW, and FOR WHOM questions.

MIXED ECONOMIES

OR

MODIFIED FREE ENTERPRISE ECONOMY

Most economies in the world today feature some

mix of traditional, command,

economies.

The United States has a

combination of command

(planned) and market

economies.

We have a market (free

enterprise) economy with

some government

intervention.

and market

SPECTRUM

Planned

OF MIXED ECONOMIES

Free Socialism

The Role of Government

Promotes competition and

Supplies' Public Goods

Makes most, if not all Economic Decisions

Owns most key resources

Nort

h K

ore

a

Russia

India

Fra

nce

Chin

a

Ge

rmany

Gre

at

Brita

in

Canada

United S

tate

s

Hong K

ong

C

SECTION 2

EVALUATING ECONOMI

PERFORMANCE

1) Economic Freedom –

freedom to make your own economic

decisions

2) Economic Efficiency – benefits gained must be greater

costs incurred

3) Economic Equity – a

strong sense of justice,

impartiality, and fairness

R

than

EVALUATING ECONOMIC

PERFORMANCE CONTINUED

4) Economic Security – protection

adverse economic events as layoffs and

illnesses

from

5) Full Employment – to produce as many

jobs as possible

6) Price Stability – steady prices, void of

inflation

7) Economic Growth – to meet the needs

of population growth

SECTION 3

FREE ENTERPRISE CAPITALISM

In a Capitalistic Economic

System individuals own most of

the factors of production. This

economic system exists due to

free enterprise. In a free

enterprise economy, competition

is allowed to flourish with a

minimum of governmental

interference.

MAJOR FEATURES OF CAPITALISM

1. Economic Freedom

2. Voluntary Exchange

3. Private Property Rights

4. Profit Motive

5. Competition

COMPETITION & FREE ENTERPRISE

Economic Freedom allows

individuals and businesses to

choose their economic

destiny.

A Voluntary Exchange

happens when both parties

benefit from the transaction.

COMPETITION & FREE ENTERPRISE CONTINUED

The privilege that entitles people

to own and control their

possessions as they wish is known

as Private Property

Rights.

g.

COMPETITION & FREE ENTERPRISE

Profit is the extent to which

persons or organizations are better

off at the end of a period than

they were at the beginning.

CONTINUED

Profit motive is the driving

force that encourages people and

organizations to improve their

material well being.

COMPETITION & FREE ENTERPRISE CONTINUED

The result of Competition is that

goods and services are produced at

the lowest possible cost and allocated to those who are willing

and able to pay for them.

R

THE ROLE OF THE ENTREPRENEUR

The entrepreneur is one of the most important people

in a free enterprise (capitalistic) economy. The

entrepreneur organizes and manages land, labor, and

capital in order to seek the reward

called profit. In other words – Entrepreneurs

make things happen.

THE ROLE

Consumers play

OF THE CONSUMER

an important role in the

American Free Enterprise economy.

They control what is produced when they express

their wants

services.

through purchasing goods and

R

THE ROLE OF GOVERNMENT (CONTINUED)

Provider & Consumer –

Federal, State and Local

governments provide goods and services for citizens.

the process of providing,

government consumes

factors of production.

In

THE ROLE OF GOVERNMENT

Protector – The

government protects

property rights and

enforces contracts to

ensure an efficient

and fair economy.

THE ROLE OF GOVERNMENT (CONTINUED)

Regulator – The national government

charged with preserving competition. Local

and state governments control

businesses with zoning regulations,

is

taxes, insurance rates, etc.

Promoter of National Goals The government should reflect

the will of the majority of its

people.