Three Key Economic Questions
 What goods and services should be
produced?
 How should goods and services be
produced?
 Who consumes the goods and services?
Economic Goals and Societal Values
 Economic Efficiency
 Economic Freedom
 Economic Security and Predictability
 Economic Equality
 Economic Growth and Innovation
Three Kinds of Economies
Traditional
Market
Command
Based on tradition and
religion
Little govt involvement
Govt control of economy
Production driven by
demand- the invisible
hand
State owned enterprises
Centralized authority
Little innovation
Central authority chooses
what to make
Competition
No competition
Private ownership of
means of production
Income equality
Income inequality
Stagnation
Innovation
Creating your own system
 You have just landed on a desert island and you need
to decide which kind of economy to put in place.
 Some of you will represent the Market Economy camp
and some will represent the Command Economy
camp.
 To create your system, you will need to take the
following steps and answer the following questions:
Creating your own system
 Step 1: Prioritize your economic goals
 Step 2: Answer the following questions
 Who decides how resources will be allocated?
 Who owns the factors of production?
 Who determines what goods and services will be
produced?
 Who determines prices?
 How is income distributed?
 Must all members contribute equally?
 What is the role of “government” in the economy?
Free Market Circular Flow Model
Self Regulating Nature of the Free
Market
 Self Interest is the motivating factor
 Incentive for consumers to find lower prices and for
firms to make higher profits leads to competition
 Encourages innovation that leads to economic growth
through creative destruction
 Self Interest and Competition regulate the market
place to produce the highest quality goods at the
lowest possible prices
The big failing of the Free Market
Competition and Creative
Destruction!!!
Mixed Economy Circular Flow Model
Benefits of Mixed Economies
 Deals with the free rider problem
 Can overcome market failures
 Overcome the vicissitudes of the market through
redistribution (Welfare, Social Security, Disability,
Workers Compensation, Medicare)