ECONOMIC
SYSTEMS
What is an Economic
System?
• Economic system – how a country decides to
create, buy and sell products & resources
• 3 Basic Questions to Figuring Your System
– What will we produce with our resources?
– How will we produce the products chosen?
– Who are we producing these goods for?
• Extremely difficult to answer these questions
Breakdown of Questions
• What to Produce?
– Must ask this due to scarcity of resources
• Don’t have enough to produce everything
• Do you choose what people need or what is profitable?
• How to Produce It?
– Large factories or mom and pop shops
– Corporate farms or family farms
• Who Gets It? (Toughest of the Questions)
– How do you decide who gets it?
• Base it on need? Base it on wealth? Base it on first in
line? Base it on equality or fairness?
• How do then decide who is in need or what is fair?
Economic Systems Based on
Your Economic Goals
• Six possible economic goals
– Can choose to achieve one or more, not all 6
• Economic Freedom – all people have full
freedom of what to make and buy or sell
without government interference
– Usually a goal, but tough to achieve fully
– People want protection from violators and
government expected to do this
Other Economic Goals
• Economic Efficiency – economy strives to
not waste ANY of its resources
– Includes all natural and human resources
– Has a goal of FULL EMPLOYMENT – no waste
• Economic Equity – strives to give all in
society an equal amount
– Problems arise with what is equal?
• Does everyone get a little?
• Do the rich or the poor receive more?
Other Economic Goals
• Economic Growth – strives to produce more
and better goods
– Usually a goal of all economic systems
• Economic Security – strives to support those in
society who cannot provide themselves
– Includes the too young or old, sick or dying, etc.
• Economic Stability – strives to keep the
economy stable and running well
– Keeps things predictable; having goods, water,
electricity, jobs and prices relatively consistent
3 Basic Economic Systems
• Traditional Economy – oldest system
– Based on the traditions and customs of a group of
people – hunter-gatherers, etc.
– Often found in small clan societies
• Command Economy – decisions by a powerful ruler
– Ancient civilizations are an example
• Egyptian pharaohs commanding what to grow and what to do
with taxes, people, slaves, etc.
• Market Economy – decisions by individual
consumers
– Free Market Economy – no one tells anyone what to
make, all choices are made voluntarily
• Strive to achieve economic freedom and efficiency
The Flow of Goods and
Money
• Markets work well due to circular flow
– One person’s output is another’s input
• Flow goes between households and firms
– Households include a person or group of people
– Firms are businesses
• Land, labor and capital are traded for
wages
• Goods are traded to people for money
What is an Economic
System?
• Economic system – how a country decides to
create, buy and sell products & resources
Two types of markets in
model
• Product market – deals with the goods and
services created by firms which are bought by the
households
• Factor market – deals with factors given up by
households and paid for with wages or purchases
of land
– Considered factor payments
• All these things work without intervention
because people are worried about their own
interest
– People work for money to buy goods, firms build
products to sell them for profit
Capitalism, Socialism, and
Communism
• All born out of the Industrial Revolution
– People become rich off new machines; poor workers
working in terrible conditions
• Socialism - created to help the workers
– Idea that society owns all property – equality
– Spreads through USSR and other countries
• Communism – society owns all property and
wealth
–
–
–
–
Struggles due to use of a command economy
Government tried to control over 24 million products
Unable to do so like markets can and resources wasted
No incentive to work harder so products are poor
Governments Role in
Economy
• Govt needed to set up institutions for markets
– Legal system, currency, labor laws, etc.
– Also limits sale of dangerous products
• Certain foods, drugs, cosmetics, etc.
• Govt also provides services that would not usually
be available due to price
– Public works – sewers, roads, highways, etc.
– Each country different in what they provide to society
• Role of government determines level of freedom
Governments Role in the
Flow of Goods and Money
• Government adds a new level to the flow
– Employs largest number of workers in US
– Also purchases largest number of goods
• Government collects taxes to purchase goods
– Also pays wages to employees for services
• Also goes to pay for services like Soc. Sec.
– These referred to as transfer payments
• Transfers money from one household to another
• Govt involvement places countries on the Mixed
Economy Continuum
– Explains the level of economic freedom of each country
What is an Economic
System?
• Economic system – how a country decides to
create, buy and sell products & resources
What is an Economic
System?
The US Economic System
• US has a free enterprise system
– Individuals control all factors of production
– Described as laissez-faire – without government
• Offers competition and equal opportunity
– Also have contracts – agreements between buyer/seller
• Property Rights – rights to own property
– Includes intellectual ideas, copyrights, patents, etc.
• Profit Motive – our incentive to work harder or
create new products and ideas or services
• Limited government involvement
– Usually limited to protecting or supporting the people
• Property rights/ contracts, general welfare, preserve
competition, protect buyers/sellers, and stabilization