Economic
Systems
Evaluating
Economic
Performance
Capitalism
and
Economic
Freedom
2-1
2
CHAPTER
Economic
Systems &
Decision
Making
ECONOMIC SYSTEMS
Economic
Systems
Evaluating
Economic
Performance
Capitalism
and
Economic
Freedom
2-2
THE MARKET
SYSTEM
Pure Capitalism
Laissez-faire
“Let it be”
ECONOMIC SYSTEMS
Economic
Systems
Evaluating
Economic
Performance
Capitalism
and
Economic
Freedom
2-3
THE MARKET SYSTEM
Pure Capitalism
Laissez-faire
“Let it be”
THE COMMAND SYSTEM
Socialism
Communism
Economic
Systems
Evaluating
Economic
Performance
Capitalism
and
Economic
Freedom
ECONOMIC SYSTEMS
TRADITIONAL SYSTEM
– Based on habits
and/or customs
–Tribal, indigenous
MIXED ECONOMY
–Has elements of two
or more systems.
2-4
ECONOMIC GOALS
Economic
Systems
Evaluating
Economic
Performance
Capitalism
and
Economic
Freedom
2-5
•Economic Freedom
•Economic Efficiency
•Economic Equity
•Economic Security
•Full Employment
•Price-Level Stability
•Economic Growth
COMPLIMENTS
T
R
A
D
E
O
F
F
S
Economic
Systems
Evaluating
Economic
Performance
Capitalism
and
Economic
Freedom
The
Market
System
2-6
CAPITALIST IDEOLOGY
Economic
Systems
Evaluating
Economic
Performance
Capitalism
and
Economic
Freedom
2-7
PRIVATE
PROPERTY
FREEDOM OF
ENTERPRISE
& CHOICE
SELFINTEREST
COMPETITION
CAPITALIST IDEOLOGY
Economic
Systems
Evaluating
Economic
Performance
Capitalism
and
Economic
Freedom
2-8
PRIVATE
PROPERTY
FREEDOM OF
ENTERPRISE
& CHOICE
SELFINTEREST
COMPETITION
MARKETS
& PRICES
ACTIVE, BUT
LIMITED,
GOVERNMENT
GLOBAL PERSPECTIVE
Economic
Systems
Evaluating
Economic
Performance
Capitalism
and
Economic
Freedom
Index of Economic Freedom, Selected Nations
Rankings among 157 nations, 2008
FREE
MOSTLY
FREE
MOSTLY
UNFREE
REPRESSED
2-9
1 Hong Kong
3 Ireland
5 United States
20 Belgium
31 Spain
48 France
101 Brazil
126 China
134 Russia
148 Venezuela
156 Cuba
157 North Korea
THE MARKET SYSTEM AT WORK
Economic
Systems
Evaluating
Economic
Performance
Capitalism
and
Economic
Freedom
2 - 10
The Three Fundamental Questions...
What will be produced?
THE MARKET SYSTEM AT WORK
Economic
Systems
Evaluating
Economic
Performance
Capitalism
and
Economic
Freedom
2 - 11
The Three Fundamental Questions...
What will be produced?
How will the goods be
produced?
THE MARKET SYSTEM AT WORK
Economic
Systems
Evaluating
Economic
Performance
Capitalism
and
Economic
Freedom
2 - 12
The Three Fundamental Questions...
What will be produced?
How will the goods be
produced?
Who will get the goods
and services?
WHAT WILL BE PRODUCED?
Economic
Systems
Evaluating
Economic
Performance
Capitalism
and
Economic
Freedom
Those goods and
services that make a
profit.
Profit = Total Revenue – Total Cost
2 - 13
Economic
Systems
Evaluating
Economic
Performance
Capitalism
and
Economic
Freedom
2 - 14
HOW WILL THE GOODS AND
SERVICES BE PRODUCED?
Least Cost Production
Maximizing output
while minimizing cost.
Economic
Systems
Evaluating
Economic
Performance
Capitalism
and
Economic
Freedom
2 - 15
WHO WILL GET THE GOODS
AND SERVICES?
• The market determines
the price.
• Those willing to pay that
price receive the goods
and services.
• Income is the key.
Economic
Systems
Evaluating
Economic
Performance
Capitalism
and
Economic
Freedom
2 - 16
THE CASE FOR THE
MARKET SYSTEM
• Efficiency
• Incentives
• Freedom