TOPIC 2
FREE ENTERPRISE &
OTHER ECONOMIC
SYSTEMS
3 BASIC ECONOMIC QUESTIONS
How do societies meet people’s wants & needs?
(Resources are scare everywhere)
3 BASIC ECONOMIC QUESTIONS
1. What goods & services should be
produced?
2. How should goods & services be
produced?
3. Who consumes the goods & services
that are produced?
3 BASIC ECONOMIC QUESTIONS
1. What goods & services should be
produced?
2. How should goods & services be
produced?
3. Who consumes the goods & services
that are produced?
SAHARA 1
2
3
Zimbabwe
4
Ecuador community garden
3 BASIC ECONOMIC QUESTIONS
What to produce: Defense? Education?
Consumer goods?
How: Public or private schools?
Oil or solar power?
Who consumes: Who goes to college? Who gets to
buy food?
Who depends on how society distributes income.
How much to doctors make? Teachers? Mail
carriers?
HOW?
ECONOMIC GOALS OF
A SOCIETY
Efficiency
Freedom
Security
Equity
Growth
In your notes,
describe what you
think each of these
means
ECONOMIC GOALS OF SOCIETY
• Efficiency: Resources are scarce so societies try to
maximize what they can produce
• Freedom: People value the opportunity to make their
own choices
• Security: People don’t like uncertainty, so societies try
to reassure people that g&s will be available when
needed
• Safety nets
• Equity: Fairness (Should every one get the same?
Should consumption depend on production? Provide for
those who are unwilling to produce?)
• Growth: A nation’s economy must grow with its
population
• Improve standard of living
ECONOMIC SYSTEM
The structure of methods &
principles a society uses to
produce & distribute goods &
services.
There are 4 different Economic
Systems
Depending on how a society answers the 3 basic
questions (depending on how much they value the 5
different economic goals)
Read the article on the Types
of Economic Systems.
Write down 5 things you
learned from the article.
5 full sentences
MARKETS
Market: Any arrangement that allows
buyers & sellers to exchange things
Participants in a free market:
Households & Firms
Consumers of
g&s
Produce g&s
CIRCULAR FLOW
MODEL
Products
Resources
ADAM SMITH
Scottish social philosopher
1776 published The Wealth of Nations
Competition & self-interest drive free
markets
INCENTIVES
Hope of reward or fear of penalty
Encourages a person to behave in a certain way
THE INVISIBLE
HAND
People act in self-interest
Consumers buy what they want,
Producers make what will make $
Competition causes firms to produce more
& regulates price
Market place operates efficiently with no
central planning
COMMAND
ECONOMIES
Operate in direct contrast to free market
enterprises.
Socialism: a range of economic & political
systems based on the belief that wealth
should be evenly distributed throughout
society
Communism: Central government owns &
controls all resources & makes all economic
decisions
KARL MARX
German philosopher
Unlike Adam Smith, stressed the
tensions between labor & capital
Labor was source of value, but under
capitalism, factory owners earned the
profit
Capitalism was exploitation of workers
MIXED ECONOMIES
Market system with some government involvement
Every system is flawed
Traditional:
little potential
for growth of
change
Command: Stifle
innovation, don’t
meet consumers
needs, limit
freedom
Free Market:
People don’t
always get things
right
Laissez-faire: Government
generally should not
intervene in the market
place
REASONS FOR MIXED
ECONOMY
Governments may limit child labor to protect children’s health and
safety.
CIRCULAR FLOW MODEL
OF A MIXED ECONOMY
Singapore is one of the world’s freest markets today
UNITED STATES
Foundation of our economy is a free market
United States Free Enterprise System
US government provides vital services,
promotes general welfare, & keeps order.
Too much or too little government
involvement?
While almost all countries have mixed economic
systems, some lean farther toward planned economies
and others lean more toward free markets. Analyze
Information How would you describe the location of the
United States on this continuum?
TOPIC 2.5 BENEFITS
OF FREE ENTERPRISE
Opportunity
Incentives
Competition
Private property rights
Pg. 44
2.6 ECONOMIC
GROWTH
Tracking the Economy
Yesterday you bought a pack of gum . . . or a
new bike . . . or your first car. Your purchase
was just one of millions of exchanges that took
place across the country that day. Government
economists track these patterns of buying and
selling in order to assess the state of the
American economy.
Macroeconomics: study of economic
behavior & decision-making in a
nation’s whole economy
Microeconomics: study of economic
behavior & decision-making in small
units (ex. Households & firms)
GDP
Gross domestic product
Total value of g&s
purchased in a country in a
given year
Expansion, country
produces more than
it did before, GDP
increases
Contraction, country
produces less, GDP
goes down
Expansion &
contraction is
called business
cycle
2.7 PUBLIC GOODS
Public goods: shared good or
service for which it would be
inefficient or impractical to make
consumers pay individually, & to
exclude those who did not pay