Economic Systems
The method used by a society to produce and distribute goods and services!
Because resources are so scarce societies and nations have to answer
some hard questions.
3 main Questions
 What goods and services should be produced? How do we decide?
 How they should be produced?
 Who consumes these goods and services? Who is it for? How is it divided
up?
Answer these three questions
General Economic Goals Economic systems try to Address
Economic Efficiency
 Try to maximize what they get for the resources they have to work with
 Create a CD instead of making records
 Product that will reach consumers
Economic Freedom
 Freedom from the government in production and distribution of goods and
services
Economic Security and Predictability
 Goods and services will be available (Milk at the store)
o Taken care of in times of need
 Government plays as a safety net taking care of people (lost jobs, injured,
and disasters.)
Economic Equity
 Equal payment for equal work
(People make different amounts for different jobs)
Economies and Values
☻Traditional Economies
Traditional economy
-rely on customs, rituals to decide what to produce.
No changing
Usually small and tight knit
Don’t deal well with change
☻Market Economies
Decisions are made by individuals
Based on exchange or trade
Free markets/capitalism
☻Command Economies
Centrally planned economy
Gov’t decides what to produce and how much
Command economies
☻Mixed Economies
Combination of both
Limited gov’t involvement
What is self-interest?
☻it motivates the market
Why do the markets exist?
☻Specialization
☻Buying and selling
Free Market Economy
-voluntary exchanges in markets
-money and products
Individuals and Markets
☺Households –People living in the same residence
--controls/ownes the 3 factors of productions
☺Firm—Organization that uses resources to build and sell goods.
Factor Market
☺firms buy factors of production from households and then in turn
produces goods.
Product Market
Self Regulating nature of the Market
Self-interest
Own personal gain
What are our motivating forces?
Incentives
Hope of reward or fear of punishment that encourages a person to act a
certain way
Competition
The struggle between producers for consumer dollars
The Invisible Hand
Self-interest and competition work together to regulate the marketplace.
Adam Smith explained the market place using this theory.
Advantages of the Free Market
1.
Economic Efficiency
a. Producers make only what consumers want
b. When and at a price that they will pay
2.
Economic Freedom
a. Workers work where they want
b. Producer what they want
c. Consume what they want
3.
4.
Economic Growth/New Ideas
Additional Goals
a. Wide variety of goods/services
b. Consumer sovereignty
c. Consumers decide what is produced
The Free Market
Why do markets exist?
What is self-interest?
 It motivates the market
Free market Economy
 Voluntary exchanges in markets
 Exchange money and products
In the market there are:
 Specialization
 Buying and selling
Who is involved?
 Individuals and Markets
o Households- People living in the same residence
 Control/owns the 3 factors of production
o Firms- Organization that uses resources to build and sell goods
Flow of the market:
-Firms buy from households and then in turn produce goods.
The market self regulates itself by:
 Self-interest
o Own personal gain
o What are our motivating forces?
 Incentives
o Hope of rewards or fear of punishment
 Competition
o The struggle between producers for consumer dollars
Advantages of the free market
1. Economic Efficiency
a. Producers make only what consumers want
2. Economic Freedom
a. Workers work where they want
b. Producers produce how they want
c. Consumers buy what they want