Chapter 2
Economic Systems
Answering the 3 Basic Economic
Questions
Every economy is trying to find
the “best” way to distribute scarce
resources
Answering the 3 Basic Economic
Questions
What goods and services will the
economy produce?
How should these goods and
services be produced?
Who is going to consume these
goods and services?
Kinds of Economic Systems
Market Capitalism (a.k.a. Free
Market, Free Enterprise)
Traditional
Market Democratic Socialism
(a.k.a. Socialism)
Authoritarian Socialism (a.k.a.
Communism)
Market Capitalism
Individuals own
resources and
means of
production
Basically free
from government
control
Adam Smith
Market Capitalism
Goal: to motivate
people through
economic reward
People keep the
profits from their
hard work
Adam Smith
Market Capitalism
Characteristics
 Private Property
 Freedom of Choice
 Self-Interest
 Profit Motive
 Supply and Demand
 Competition
 Limited Government
Adam Smith
Market Capitalism
Examples : U.S.,
Australia, South
Africa, Chile
Political System :
Democracy
Adam Smith
Traditional
Economy does
things as it
always has
Traditional
Goal: to
maintain the
same tradition
Methods:
resist new
technologies
Traditional
Examples: the
Amish in the U.S.,
tribes living within
developed
countries
Political System:
Tribal Organization
Market Democratic Socialism
Socialism – term
implying
redistributing
money from the
rich to the poor
Government owns
major means of
production (ex.
Transportation,
Steel, Oil, etc.)
Market Democratic Socialism
Goal: Equal
distribution of
income
Methods
High Taxes
 Benefits paid to
low income
individuals

Market Democratic Socialism
Examples:
Norway, Mexico,
Canada
Political System:
Socialistic
Democracy
Authoritarian Socialism
(Communism)
Government
owns all property
Total government
control of the
economy
Karl Marx
Authoritarian Socialism
(Communism)
Goals: equal
distribution of
income with no
social classes
Karl Marx
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Authoritarian Socialism
(Communism)
Methods
Working class
revolts against
the rich owners
 One political
party controls all
government
planning

Karl Marx
Authoritarian Socialism
(Communism)
Characteristics




Public Ownership
Centralized
Decision Making
Economic Planning
Allocation by
Command
Karl Marx
Authoritarian Socialism
(Communism)
Examples: Old
Soviet Union,
Cuba, North
Korea
Political System:
Totalitarian
Communism
Karl Marx
Authoritarian Socialism
(Communism)
Key Terms from
Communist
Manifesto

Proletariat – the
average worker
who (according to
Marx) is exploited
by capitalism
Karl Marx
Authoritarian Socialism
(Communism)
Key Terms from
Communist
Manifesto

Bourgeoisie – the
rich, ruling class
that uses the
proletariat to
make money
Karl Marx
Free Market vs. Central Planning
Free Market
Advantages

Self-Regulating
– produces what
is needed and
wanted with no
government
interference
Free Market
Disadvantages
Free Market vs. Central Planning
Free Market
Advantages

This self
regulating is a
result of people
acting on selfinterest and
incentives
Free Market
Disadvantages
Free Market vs. Central Planning
Free Market
Advantages

Competition
holds prices to
the lowest levels
while spurring
new invention
Free Market
Disadvantages
Free Market vs. Central Planning
Free Market
Advantages

Consumer
Sovereignty –
people are free
to buy what they
want
Free Market
Disadvantages
Free Market vs. Central Planning
Free Market
Advantages

Encourages a
very high degree
of economic
growth
Free Market
Disadvantages
Free Market vs. Central Planning
Free Market
Advantages
Free Market
Disadvantages

Economic equity
and security do
not occur in a
purely free
market
Free Market vs. Central Planning
Free Market
Advantages
Free Market
Disadvantages

Market has no
incentive to build
“public” goods
like roads or
libraries
Free Market vs. Central Planning
Free Market
Advantages
Free Market
Disadvantages


Spillover costs
(negative
externalities) –
some problems
created that effect
people who didn’t
cause them
Ex. - Pollution
Mixed Economies
Attempt to get the best out of free
market and central planning
Government takes action to
protect consumers when it feels it
is necessary
For Example, in the U.S.:
FDA screens food and
drug items to ensure
their safety
Government breaks up
harmful monopolies
under the Sherman
Anti-Trust Act
Government provides
welfare benefits to
people who cannot find
a job