Economic systems

1. Economic SystemsEconomic Systems
Economic Fundamentals UnitEconomic Fundamentals Unit
Chapter 3Chapter 3

2. Economic SystemsEconomic Systems

3. Three BasicThree Basic
QuestionsQuestions
• What to produce?What to produce?
• How to produce?How to produce?
• For whom?For whom?
Answers depend on goals
and economic system

4. Goal: EconomicGoal: Economic
FreedomFreedom
• Individuals &Individuals &
businessesbusinesses
determine what,determine what,
how and forhow and for
whom to producewhom to produce

5. Goal: SecurityGoal: Security
• governmentgovernment
provides shelter,provides shelter,
food and otherfood and other
basic necessitiesbasic necessities
for people whofor people who
need itneed it

6. Goal: EfficiencyGoal: Efficiency
• ResourcesResources
allocated soallocated so
largest number oflargest number of
people get whatpeople get what
they want; verythey want; very
little waste oflittle waste of
resources.resources.

7. Goal: EquityGoal: Equity
• Everyone getsEveryone gets
their fair share oftheir fair share of
goods andgoods and
servicesservices
• Hard to achieve –Hard to achieve –
Why?Why?

8. Goal: GrowthGoal: Growth
• EconomyEconomy
produces moreproduces more
and better goodsand better goods
and servicesand services
• Requirement:Requirement:
innovation orinnovation or
new ideasnew ideas

9. Goal: StabilityGoal: Stability
• Goods you need are always available;Goods you need are always available;
economic certaintyeconomic certainty
• Predictable prices; stable employmentPredictable prices; stable employment

10. Economic SystemsEconomic Systems
and Goalsand Goals

11. TraditionalTraditional
Economic SystemEconomic System
• Three basicThree basic
questions answeredquestions answered
using?using?
• Custom andCustom and
traditiontradition
• GOAL: SecurityGOAL: Security
and Stabilityand Stability

12. Command EconomicCommand Economic
SystemSystem
• Three basic questionsThree basic questions
answered using?answered using?
• Single authority (ruler orSingle authority (ruler or
government agency orgovernment agency or
dictator)dictator)
• GOAL: Security andGOAL: Security and
EquityEquity

13. Market EconomicMarket Economic
SystemSystem
• Three basicThree basic
questions answeredquestions answered
using?using?
• Decisions ofDecisions of
producers andproducers and
consumersconsumers
• GOAL: EfficiencyGOAL: Efficiency
and Freedomand Freedom

14. Mixed EconomicMixed Economic
SystemSystem
• Three basic questionsThree basic questions
answered using?answered using?
• Decisions of individualsDecisions of individuals
and governmentand government
• GOAL: Freedom,GOAL: Freedom,
Stability and Equity?Stability and Equity?

15. Circular Flow ModelCircular Flow Model

16. PurposePurpose
• Circular flowCircular flow
models showmodels show
how money,how money,
goods andgoods and
services circulateservices circulate
in marketin market
economyeconomy

17. Circular Flow ModelCircular Flow Model
- Terms- Terms
• Product Market: goods/services sold by firms.Product Market: goods/services sold by firms.
Firms sell, households buyFirms sell, households buy
• Factor Market: goods/services sold byFactor Market: goods/services sold by
households. Households sell, firms buyhouseholds. Households sell, firms buy
• Factor payments: households give for $$Factor payments: households give for $$
• Give labor for wagesGive labor for wages
• Rent out landRent out land
• Loan $ for interest paymentsLoan $ for interest payments
• Buy stock for dividendsBuy stock for dividends

18. Free EnterpriseFree Enterprise
Economic SystemEconomic System
CharacteristicsCharacteristics

19. Free Market (Laissez Faire)Free Market (Laissez Faire)
economyeconomy
• Individuals own factors of productionIndividuals own factors of production
• Individuals answer 3 basic economicIndividuals answer 3 basic economic
questionsquestions
• No government involvement in economyNo government involvement in economy

20. Characteristics ofCharacteristics of
U.S. Economic systemU.S. Economic system
Pg. 50 in bookPg. 50 in book
1.1.Economic Freedom – individuals act in ownEconomic Freedom – individuals act in own
best interestbest interest
2.2.Competition – anyone can own a businessCompetition – anyone can own a business
3.3.Binding contracts- decide which contracts toBinding contracts- decide which contracts to
enter in toenter in to
4.4.Property Rights – right to own and useProperty Rights – right to own and use

21. CharacteristicsCharacteristics
cont.cont.
5.5. Equal Opportunity: same legal rights toEqual Opportunity: same legal rights to
seek education, to compete in marketplaceseek education, to compete in marketplace
etc.etc.
6.6. Profit Motive – incentives matter!Profit Motive – incentives matter!
7.7. Limited governmentLimited government
• Protect competitionProtect competition
• Protect property rightsProtect property rights
• Promote general welfarePromote general welfare
• Protect consumersProtect consumers