Lesson Objectives:
By the end of this lesson you will be able to:
*Explain the rise of mixed economic systems.
*Interpret a circular flow model of a mixed economy.
*Compare the mixed economies of various nations along a
continuum between centrally planned and free market systems.
*Describe the role of free enterprise in the United States
Economies and You
Even though we experience a high level of economic freedom in the United States, we do have limits
on our rights. For example, a person under 18 years of age cannot legally purchase certain items,
and everyone who earns income in the United States must pay taxes.
The Rise of Mixed Economies
Every economic system has problems.
*Traditional economies have little potential for growth or change.
*Centrally planned economies do not allow innovation, do not meet consumer needs, and limit
*Free market economies usually have an unequal distribution of wealth.
Reasons for Government Involvement
Early free market thinkers such as Adam Smith believed that the free market would provide the
greatest benefit for consumers and raise the standard of living. They favored laissez faire (little to no
government interference) in their markets. Yet even Smith acknowledged the need for a limited
degree of government involvement.
Over the years government intervention has increased for several reasons:
1. Needs of modern society would be difficult to meet in the marketplace (national defense).
2. Gov’t supplies some needs in order to ensure that all members of society can benefit (free
public school education for all citizens).
3. Gov’t protects property rights (5th amendment protects life, liberty, & property).
4. Gov’t makes sure market exchanges are fair (product labels must be honest).
No nation today has a pure free market economy or a pure
command economy. Instead, most modern economies are
mixed. A mixed economy is a market-based economic system in
which the government is involved to some extent. The degree of
government involvement varies from nation to nation.
Balancing Needs and Freedom
Every society must figure out their economic goals based on
what is best for their nation.
*Some goals are better met by open markets
*Some goals may be better achieved through government action.
Questions of a Mixed Economy:
*Is the nation willing to pay taxes to fund the army?
*Is the nation willing to give money to people who lose their jobs?
*Is the nation willing to give all people an education?
Circular Flow Model of a Mixed Economy Video
Circular Flow Model of a Mixed Economy:
Government in The Factor Market
Firms purchase land, labor, & capital from households in the
factor market. The same is true of governments.
*For example, The U.S. government pays 2.7 million employees
$152.2 billion dollars a year for their labor.
Government in the Product Market
Like households, governments purchase goods and services from
firms in the product market.
*For example, printing money requires many tons of paper and
gallons of ink. These items are purchased from private firms.
Transferring Money
Government collect taxes from both households and businesses.
Governments then transfer some of this money to businesses &
individuals for a variety of reasons. The largest expenditure of
the United States government is Social Security.
Comparing Mixed Economies
Mixed Economies Where Government Intervention Dominates
North Korea represents this type of mixed economy. Like the former Soviet Union, communist
North Korea has an economy almost totally dominated by the government.
North Korea
*The government owns all property & economic output.
*State owned industries produce 95% of North Korea’s goods.
*Imports from other countries are banned.
China used to have this type of economy as well but they are currently going through economic
transition. Economic transition is a period of change in which a nation moves from one economic
system to another. In China’s case, the transition involves privatizing state-owned firms.
Privatization is the process of selling businesses or services operated by the government to individual
Comparing Mixed Economies Continued
Mixed Economies Where the Free Market System Dominates
In Hong Kong, the private sector rules. The government protects
private property and rarely interferes in the free market. The
areas is highly receptive to foreign investment and places
virtually no barriers on foreign trade. Banks in Hong Kong operate
independently from the government, and foreign-owned banks
have nearly all the rights of domestic ones.
The United States Economy
While the American economy is a mixed system, the foundation
of the United States economy is the free market. An economic
system characterized by individual or corporate ownership of
capital goods is called a free enterprise system. In this system,
investments in firms are made in a free market by private
Government Intervention
The government of the United States plays a substantial role in
the American economy. The American government:
*Keeps order
*provides vital services
*promotes the general welfare
*Federal & State laws protect private property.
Some Americans argue that there is a need for more
government services and stricter regulation of businesses while
others say that the government already intervenes too much in
the economy.
Economic Freedom
Overall, the United States enjoys a high level of economic
freedom. Foreign investment and free trade are encouraged.
The banking industry operates under relatively few restrictions.
Foreign-owned banks have few additional restrictions.