Economic Systems & Decision Making

2C H A P T E R

ECONOMIC SYSTEMS

THE MARKET SYSTEMPure Capitalism Laissez-faire

“Let it be”THE COMMAND SYSTEM

SocialismCommunism

ECONOMIC SYSTEMS

TRADITIONAL SYSTEM◦ Based on habits and/or customs

◦Tribal, indigenousMIXED ECONOMY◦Has elements of two or more systems.

TRADEOFFS

•Economic Freedom•Economic Efficiency•Economic Equity •Economic Security•Full Employment•Price-Level Stability•Economic Growth

ECONOMIC GOALS

COMPLIMENTS

The Market System

CAPITALIST IDEOLOGY

FREEDOM OFENTERPRISE& CHOICE

PRIVATEPROPERTY

SELF-INTEREST

COMPETITION

MARKETS& PRICES

FREEDOM OFENTERPRISE& CHOICE

PRIVATEPROPERTY

ACTIVE, BUTLIMITED,GOVERNMENT

SELF-INTEREST

COMPETITION

CAPITALIST IDEOLOGY

GLOBAL PERSPECTIVEIndex of Economic Freedom, Selected Nations

1 Hong Kong3 Ireland5 United States20 Belgium31 Spain48 France101 Brazil126 China134 Russia148 Venezuela156 Cuba157 North Korea

FREE

MOSTLYFREE

MOSTLYUNFREE

REPRESSED

Rankings among 157 nations, 2008

The Three Fundamental Questions...What will be produced?

THE MARKET SYSTEM AT WORK

The Three Fundamental Questions...

How will the goods be produced?

What will be produced?

THE MARKET SYSTEM AT WORK

The Three Fundamental Questions...

How will the goods be produced?

What will be produced?

Who will get the goods and services?

THE MARKET SYSTEM AT WORK

Those goods and services that make a profit.

WHAT WILL BE PRODUCED?

Profit = Total Revenue – Total Cost

Least Cost ProductionMaximizing output while minimizing cost.

HOW WILL THE GOODS ANDSERVICES BE PRODUCED?

• The market determines the price.

• Those willing to pay that price receive the goods and services.

• Income is the key.

WHO WILL GET THE GOODSAND SERVICES?

THE CASE FOR THE MARKET SYSTEM

EfficiencyIncentivesFreedom