Basic Economic Terms: Notes 3: Economic Systems

Answering the Economic Questions
• Economic system the method used
• The economic system chosen by a society
• Three questions to answer:
– What goods will be produced?
– How will the goods be produced
– Who consumes these goods and services?
What goods will be produced? And how will they be
• Question 1:
– No country can produce
– Each production decision that a society
• Question 2:
– Societies have to figure out a way to combine the factors
of production in
Who consumes goods and services?
• Societies decide who consumes the goods and
• Factor payments the income people
• The question of who gets to consume which goods and
services lies at the heart of economic systems
• Each society answers the question of distribution based on
Broad Social Goals for Economies
Social goal
Economic efficiency
Economic Equity
Means what is “fair.” Economic actions and policies have to be
evaluated in terms of what people think is right or wrong. Equity
issues often arise in questions dealing with the distribution of
income and wealth. Some people judge equity based on
providing equal opportunity. Others base it on the equality of
Economic Freedom
Refers to such things as the freedom for consumers to decide
how to spend or save their incomes, the freedom of workers to
change jobs and join unions, and the freedom of individuals to
establish new businesses or close old ones
Economic Growth
Refers to increasing the production of goods and services over
time. Economic growth is measured by changes in the level of all
final goods and services produced in a particular economy
Economic Security
Economic Stability
Refers to protecting consumers, producers, and resource owners
from risks that exist in society.
Refers to how well scarce productive resources are allocated to
produce the goods and services people want and how well
inputs are used in the production process to keep productions
costs as low as possible
Refers to maintaining stable prices and full employment and
keeping economic growth reasonably smooth and steady. Price
stability means avoiding inflation or deflation. Full employment
occurs when an economy’s scarce resources are fully utilized.
Two Major Economic Systems
• Free enterprise (free market) an economic
system in which individuals (not government)
• Command Economy an economic system in
which government
Resources and Government Role
• Resources  Free Market:
– Owned and controlled by
• Resources  Command:
– Owned and controlled
• Government Role  Free Market:
– Small role, does not make decisions on what or how
things should be produced
– Decisions are made
• Government Role Command:
– Government sets production levels
Economic Plans, Income Distribution
• Economic Plan specifies the
– (example: produce more trucks than wheat)
• Income distribution how all the income earned is
divided among the
– Free market gov’t. doesn’t “care” how income is
– Command
Present Economic Systems
• Almost all countries today feature parts
• Mixed economy an economy that is neither