ECONOMIC SYSTEMS

Fundamental Economic Questions

Because of scarcity—every nation must answer the three fundamental economic questions: What products will be produced? How will the products be produced? For whom will the products be produced?

What to Produce?

The What question Requires an economy to decide the mix &

quantity of goods and services that it will produce.

In US, free enterprise with consumer sovereignty answers the What question.

How to Produce?

The How question Which combination of technology and

resources to use for producing goods and services.

Should labor be more or less capital-intensive

Education plays an important role Improves the ability of workers to perform their

work

For Whom to Produce?

The For Whom question Which people receive the goods and

services produced

In a free market system Price is used to decide who will receive the

goods and services that are produced. Earn more money = buy more products

Economic systems

Economic system The methods used to answer the What,

How, and For Whom questions. Traditional Market Command

Traditional Economy

Answers the questions, the way they have been answered for generations. Inuit of Canada Amish of Pennsylvania

+ Reduces friction among members -- Restricts individual initiative

Market Economy

Answers the three basic questions based only on voluntary buying and selling in markets.

Adam Smith Invisible hand: the best interests of a

society are served by markets guided by self-interest.

Read/Think/Pair/Share

Market Economy

-- very wealthy and very poor + inequality gives people an incentive to

strive for the reward of earning more income

Milton Friedman http://www.youtube.com/watch?v=RWsx1X8

PV_A

Command Economy

Answers the questions by a dictator or central authority Former Soviet Union China in the past Cuba & North Korea

Command Economy

Socialism: based on govt. ownership of resources and centralized decision making Karl Marx Communism: classless economic system in

which all resources are owned by the workers The ideal version of socialism

Mixed Economy

Mixed Economy Answers the questions through a mixture of

traditional, command, and market systems. Most countries employ a mixed economy

United States Nationalization

The act of transforming a private enterprise into a government enterprise

Amtrak General Motors