This document discusses economic systems and the production possibilities frontier. It defines an economic system as the way a country decides to use its resources and production factors. There are three main types of economic systems - traditional, market, and command economies. A traditional economy relies on customs, while a market economy uses supply and demand and a command economy has the government control production. Most countries now use a mixed economy. The production possibilities frontier model shows the maximum combinations of two goods an economy can produce with full efficiency and available resources. Its shape is bowed out due to the law of increasing opportunity costs. The frontier can shift due to economic growth, changes in resources, capital, or technology.

1. Chapter 2
Economics Systems
Basics

2. 11/3/2021
Economic Systems
 * What is an economic system ?
 * System=order, structure, rules
 * Economic=factors of production, resources
 * Economic system =the way a country decides
 to use its resources

3. 3 Basic Economic
Questions
 1) What to produce ?
 ALLOCATION OF RESOURCES
 2) How to produce ?
 PRODUCTION & EFFICIENCY
 3) For whom to produce ?
 WHO GETS WHAT? WHY?

4. Terminology/
Vocabulary
Capitalism
Traditional Economy
Command Economy
Market Economy
Mixed Economy
Free Enterprise

5. ECONOMIC ACTIVITIES
 Found in every economy
 Generally seen as money-making
activities
 Depending on activity level, location can
or cannot be important

6. ECONOMIC ACTIVITIES
Primary Activities
Use of natural resources directly
Location: at site of natural
resource being used
Examples: farming, mining
Secondary Activities
Use raw materials to produce or
manufacture something new
Location: close to resource or
close to market
Examples: wheat into flour, steel
Tertiary Activities
Provides services to people and
business
Location: usually near customers
Examples: bakery, car dealership
Quaternary Activities
Process and distribute
information
Location: anywhere but needs
access to skilled workers,
transportation and
communication, pleasant climate
and high quality of life
Example: research, engineering

7. ECONOMIC SYSTEMS
 Economic activities are found in all
different types of economic systems
 Type of system can determine wealth of
nation
 Three main types of economy
 Traditional
 Market
 Command

8. Traditional Economy
 Found in rural, under-
developed countries–
 Vanuatu
 Pygmies of Congo
 Eskimos & Indian tribes
 Belarus
 Customs govern the
economic decisions that
are made
 Farming, hunting and
gathering are done the
same way as the
generation before
 Economic activities are
centered around the family
or ethnic unit
 Men and women are given
different economic roles
and tasks
 Advantages: people have
specific roles; security in
the way things are done
 Disadvantages:
Technology is not used;
difficult to improve

9. Adam Smith
Adam Smith
(1723-1790) is
considered
the father of
modern
economic
theory

10. Adam Smith and the
Wealth of Nations
 Published in 1776
 The “invisible hand” of markets
 Individuals acting in self-interest lead to
maximized benefit for whole society
 Importance of the division of labor
 Debunked mercantilism, began the era of
modern economics

11. Market Economy (Free Enterprise)
 Also called a Free Market
Economy or Free
Enterprise Economy
 Businesses and
consumers decide what
they will produce and
purchase and in what
quantities
 Decisions are made
according to law of supply
& demand
 Supply and demand of
goods and services
determine what is
produced and the price
that will be charged.
 Advantage—competition
to have the best products
and services
 Disadvantage—huge rift
between wealthy and
poor
 Note: a true market
economy does not exist.

12. Karl Marx
Karl Marx (1818-
1883)
Co-author
The Communist
Manifesto

13. Command Economy
 The government (or central
authority) determines what, how,
and for whom goods and
services are produced.
 Two types:
 Strong Command – where
government makes all
decisions (communism –
China, Cuba)
 Moderate Command – where
some form of private
enterprise exists but the
state owns major resources
(socialism – France and
Sweden)
 Advantages
 Guarantees equal standard of
living for everyone
 Less crime and poverty
 Needs are provided for through
the government
 Disadvantages
 Minimal choices
 Fewer choices of items
 No incentive to produce better
product or engage in
entrepreneurship
 Also known as a Planned or
Managed Economy

14. Socialism
 Broad term to say state or collective
organization of means of production
 NOT communism, but some similar
characteristics
 Tend to have large welfare systems, but also
high taxes
 Found in Northern Europe but declining in
popularity

15. Mixed Economy
 Combination of a
market and a
command economy
 Government takes
of people’s needs
 Marketplace takes
care of people’s
wants.
 Most nations have a
mixed economy: United
States, England,
Australia
 Advantage —balance
of needs and wants met
by government and in
marketplace
 Disadvantage
 —citizens have to pay
taxes

16. Transitional Economies
 Middle per-capita GDP’s
 Have developed and developing features
like large, modern city but subsistent
rural farming
 Usually migration from rural to urban
areas
 Some have quickly rising incomes
 Examples: India, China, Brazil, Thailand

17. ECONOMIC SYSTEMS
Economy Motivator Description Location
Traditional Survival People make goods
for themselves or
their families with
little surplus
Poor countries
and rural areas
Market Profit People freely
choose what to
buy and sell
Wealthier
countries like
US and Australia
Command Government
Regulations
Government
establishes
products,
locations and
prices
Communist
countries like
Cuba and
former USSR

18. Total Net Worth
Top 1
percent
Next 19
percent
Bottom
80
percent
1983 33.8% 47.5% 18.7%
1989 37.4% 46.2% 16.4%
1992 37.2% 46.6% 16.3%
1995 38.5% 45.4% 16.1%
1998 38.1% 45.3% 16.6%
2001 33.4% 51.0% 15.5%

19. Production
Possibilities Frontier
Describe the production possibilities
frontier and explain its shape.
Explain what causes the production
possibilities frontier to shift.
Objectives

20. Production Possibilities
Frontier
production possibilities frontier
(PPF)
efficiency
law of increasing opportunity cost
economic growth
Key Terms

21. Efficiency and Production
Possibilities Frontier
 PPF model
 Shows possible combinations of 2 types of goods
that can be produced when available resources are
used fully and efficiently
 Figure 2.1
 Inefficient and unattainable production
 Point I and U on the curve
 Shape of the PPF
 Any movement along PPF involves giving up
something

22. Production Possibilities
Frontier – PPF Figure 2.1
 A through F are
attainable
 I represents
inefficient use of
resources
 U represents
unattainable
combinations

23. Efficiency and Production
Possibilities Frontier
 The resources in an economy are not all perfectly
adaptable
 Law of increasing opportunity cost – each additional
increment of one good requires the economy to give up
larger increments of other good
 The PPF has a bowed-out shape due to the law of
increasing opportunity cost

24. Shifts in the PPF
 Economic Growth – an expansion in the economies
ability to produce
 Changes in resource availability
 Increase (more labor) – PPF shifts outward
 Decrease (less resources) – PPF shifts inward
 Increases in stock of capital goods
 Technological change

25. Shifts in the PPF
Increase in available resources Decrease in available resources