

All societies have an economic system or a way of providing
for the wants and needs of their people.
An Economic Systems function is to produce and distribute
goods and services to consumers
An economy must answer 3
economic questions: What
should be produced? How
should it be produced? Who
will consume these goods
and service?

How a society answers these questions
depends on how much it values
economic goals of efficiency, freedom,
security, equity and growth.
What goods or services
should be produced?
-How much resources should
be devoted to national
defense? Education? Health
care?
1)
2) How should it be produced?
 -Should we have coal, oil, or nuclear
power? Should teacher have 20 kids or
50 kids in a room?
Who
consumes the
goods and
services?
- How will
society
distribute
income? Who
will buy the
household
products?
Who will
clean your
house?
3)

Traditional economy: Relies on habit or
custom. Little innovation. Similar to
family system. Boys follow dad’s
footsteps, girls follow mom. Examples:
Hunting, farming. Low standard of living.
Market economy: Decisions made by
individuals based on exchange, trade.
(aka free markets, capitalism)
Centrally planned economy:
(aka command economy)
Government decides
everything. Example:
communism.

Mixed economy: Market-based
economy where government plays a
limited role. This is the United States.
Allocation of scarce resources, and
nearly all other economic activity, stems
from ritual, habit or custom.
 Individuals are not free to make own
decisions.
 Advantage: everyone knows the role
they play
 Disadvantage: discourages new ideas

People and firms make decisions based
on what best suits their interest. Ex. USA,
Canada and Great Britain
 Advantage: overtime it can make
changes in demand. Ex. Fast food to
health food
 Disadvantage: does not always provide
for basic needs of people. Ex. Homeless
people

A central authority (government) makes
most of the decisions.
 People have little if any influence over
production. Ex. North Korea, Cuba and
former Soviet Union.
 Advantage: can change direction
drastically in a short time. Ex. farming to
industrial
 Disadvantage: Not designed to meet the
wants of consumers (Everyone gets only 1 In
and Out burger.

Market: An arrangement that allows
buyers and sellers to exchange things.
 Markets exist because it allows people to
buy what they need to consume and sell
goods and services they produce.

Specialization: The concentration of the
productive efforts of individuals and firms
on a limited number of activities.
 Example: a mechanic specialized in
fixing Japanese cars or and assembly
line

Household: A person or group of people
living in the same residence.
 Firm: Business; an organization that uses
resources to produce a product
 Factor market: Market in which firms
purchase the factors of production
(land, labor, capital) from households

Profit: The financial gain made
in a transaction
Product market: The market in
which households purchase
the goods and services that
firms produce.
Free market is an economic system
where people do what’s best for them
for personal gain.
 Consumers have an interest in looking for
lower prices
 Producers engage in a competition for
consumer’s money.

Wrote The Wealth of
Nations in 1776
 Known as the Father of
Economics
 Said people are selfish,
but that’s ok because
it works
 Called the relationship
between self interest
and competition the
invisible hand



Said government
should stay out of the
economy (laissez faire
means ‘hands off’)
Government should
only be involved with
education, health
care and
transportation.

In your notebooks, you will create a
graphic organizer on the left side of the
Adam Smith article you are about to
read

1)
2)
3)
And answer these questions on the right hand
side. They should be full paragraphs, not 2 or 3
sentences
Rewrite in modern teenage language what
Adam Smith is saying in the opening passage
of “An Inquiry into the Nature and Causes of
the Wealth of Nations (1776)” found on page
1.
How did Adam Smith envision the universe?
Do you agree with his assessment of divine
right on page 2?
What is meant by the term “invisible hand”?
Self-interest is the motivating force behind
the free-market. People produce goods
and services for their own personal gain.
 Competition is the struggle among
producers for the dollars of consumers. This
helps control firm’s selfishness.
 Competition act’s as a regulating force in
the marketplace. Without competition a
business can monopolize a product or
service

rewards efficient producers and buyers
 results in:
 goods society wants
 quantity society wants
 prices society is willing and able to pay
 normal profits

The Free Market Economy, however,
does need some Government
intervention to provide for things that the
market place does not address.
 Example: national defense, roads and
highways, education, and health care
 Incentive: The hope of reward or the fear
of punishment that encourages people
to act in a certain way.

Why is the free market system good?
 1) It works. Producers make what
consumers want, when they want it.
Prices are pretty good.
 2) Freedom. Work where you want, buy
what you want, make what you want.

3) Growth is encouraged because
innovation is encouraged.
 4) A wide variety of things get made
because consumers decide what gets
made.


Consumer sovereignty is the power of
consumers to decide what gets
produced



Scarcity exists
Societies must find a
way to allocate
scarce goods and
services
In any allocative
mechanism, some
people will be told
“No.”


The market system is
efficient, but…
Neither markets nor
other economic
systems are “fair.”
In command economies, the government
controls the factors of production and
answers the 3 economic questions of what,
how and for whom to produce for all of
society.
 Idea is that the government makes all the
choices that will benefit or is best for the
whole society, not just a few individuals
 Command economies often associated
with socialism, communism and
authoritarianism.

Socialism is the belief that democratic
means should be used to distribute
wealth evenly through a society
 Communism is the belief that
government leaders should distribute
wealth evenly through a society.
 Authoritarianism (Fascism)- requiring strict
obedience to an authority, such as a
dictator. No individual freedoms.

Problems
 Poor Quality of Goods= workers don’t care, as long as
they produce what they are told to produce
 Shortages of Goods and Services= need products are not
made
 Diminishing Production = workers don’t care, they don’t
get raises for producing more; no incentives
 Performance always falls short of ideals that the system is
built
 Can’t meet the needs of consumers needs and wants:
Government decides what is produced, not consumers
 The system does not reward innovation, is not flexible, and
sacrifices individual freedoms for the “good” of whole
society