Centrallyplanned economies
GOVT functions that promote greater competition
GOVT functions designed to avoid the flaws of pure competition
Laissezfaire economies
Government planning of the entire economy
No government involvement in the economy

Market capitalism - capital and natural resources are generally owned by private individuals who have the power to make decisions concerning their uses [i.e., USA, ROC, Japan, W.
Europe]
Command capitalism - capital and natural resources are generally privately-owned, but government has broad power to determine their uses [i.e., Middle East, Africa, Latin America]
Command socialism - government owns most of the capital and natural resources and exercises broad power to determine how the economy’s resources will be allocated [i.e., Cuba, North
Korea]
Market socialism - government owns most of the capital and natural resources, but allows individuals who operate firms to make choices about the use of these factors [i.e., Russia, former
Warsaw Pact countries]

BASIC TENETS OF CAPITALISM
Private property - people can obtain, control, use, and dispose of the property resources they own [subject to only minimal governmentimposed limitations]
Freedom of enterprise and freedom of choice exist - individuals can become entrepreneurs; consumers can buy what they want [ a.k.a
., consumer sovereignty ]; workers can choose their vocations
Rational self-interest is the driving force of the economy -all economic actors attempt to maximize some objective ( i.e
., profits, income, satisfaction) subject to budgetary constraints and other objectives
Competition is the governing mechanism of the market - large number of buyers and sellers so that economic agents must act as pricetakers and, thus, competitors
Markets and prices coordinate economic activity - interaction of demand and supply determine allocations of society’s resources; role of government is limited

[Based on McConnell & Brue, ECONOMICS, 13th ed., pp. 81-85]
Government functions that strengthen/facilitate the operation of the market system
• provide the legal foundation and social environment conducive to the effective operation of the market system
- i.e., develop system of uniform weights and measures,
“rules of the game,” [Pure Food and Drug Act of 1906,
Fair Credit Reporting Act of 1968, etc.]
• maintain competition by enforcing or simulating competition - i.e., antitrust legislation, regulate “natural monopolies,” etc.

Government functions that modify or supplement the operation of the market system
• redistribution of wealth
(1) transfer payments
(2) market intervention
(3) personal income tax
• adjusting the allocation of resources to alter the composition of domestic output
(1) positive and negative externalities
(2) public goods/services
(3) stabilizing the economy
(a) fiscal policy
(b) monetary policy

• Aggregate demand is the total amount of money available in the economy to be spent on goods and services
• Productive capacity is the total value of goods and services that can be produced by the economy when it works at full employment
• Government can adjust imbalances by manipulating fiscal policies , monetary polices , or both

Fiscal policy is the domain of the president and Congress.
Taxes
Fiscal policy has been criticized as being:
(1) too political
Spending
(2) too slow
• recognition lag
• decision-making lag
• administrative lag
Taxes
• operational lag
Spending
Ricardian Equivalence
Theorem
“Crowding-Out” Effect

• Reserve requirements
• Discount rate
• Reserve requirements
• Discount rate
Monetary policy is the domain of the
Federal Reserve
Board.
Many economists prefer monetary policy over fiscal policy because the Federal
Reserve Board is thought to be insulated from politics and time lags are not as great.