ECONOMIC SYSTEMS and
AMERICAN FREE
ENTERPRISE
Economic Systems
• Defn
• The ways a country answers the 3 basic
economic questions determines which
economic system they have
• 4 Economic Systems:
Free Market (aka Free Enterprise,
Capitalism, and Laissez Faire)
Command (centrally planned)
Traditional
Mixed
Economic Goals:
• Shared by most societies
• Importance based on the needs and
values of each society
1. Economic efficiency- making the most
of resources
2. Economic freedom- Freedom from
govt intervention in the production
and distribution of goods and
services
3. Economic security and predictabilityAssurance that g & s will be available.
4. Economic equity- Fair distribution of
wealth
5. Economic growth and innovation- GDP
Innovation leads to economic growth,
and growth leads to a higher standard of
living.
6. Economic stability- no drastic fluctuations
in prices; no ups and downs
Traditional Economies:
• People rely on traditions or customs
to make the what, how, and who
choices
• Less common and usually found in
rural areas/ less modern
• Based on agricultural industries
• Meant to meet local needs
• Kids tend to have the same jobs as
their parents by gender
Command (Centrally Planned)
Economies:
•
•
•
•
Govt owns factors of production
Govt answers the 3 economic questions
There is NO self-interest or competition
Socialism- uses democratic means to distribute
wealth evenly; tries to couple political equality
with economic equality
• Communism- ALL power in hands of govt;
usually preceded by violent revolution. It
doesn’t allow democracy- usually authoritarian
ex- Soviet Union 1920-1991; Romania til 1989
Advantages of Centrally Planned
Economies:
• Can jump-start select industries
• Guarantee jobs and wages
Disadvantages:
• Poor quality
• Serious shortages of non-priority
goods and services
• Diminishing production
• Can’t meet consumers wants/ needs
• Lacks incentives/ rewards to workers;
discourages change & innovation
• Lacks flexibility
• Decisions become overly complicated
• Sacrifices individual freedom for social
goals
** Most command economies have moved
toward mixed economies b/c they can’t
meet consumer’s needs, were inefficient,
and public unrest due to lack of freedom
Free Market:
• Market- defn ex- mall, internet, catalogue, etc.
• Specialize- defn markets allow for easy
exchanges of goods/services we specialize in
for those that others specialize in
• Free Market- defn Ask yourself: who owns the
factors of production??
• What motivates us? If this is true, how can we
promote the best interests of society as well?
• Adam Smith- father of economics; Wealth of
Nations He said we are guided by the invisible
hand (defn) and competition regulates us.
4 Pillars of Free Enterprise:
1. Private property- we
decide how to use/care for
things we own; this gives
us incentive to use our
resources efficiently
2. Price system- prices guide
us by giving us information
about products/ resources;
they also provide us with
strong incentives
3. Market competition- scarcity
makes firms and consumers
compete for g & s
-firms compete for profits (defn)
P=TR-TC
4. Entrepreneurship- encouraged
by Free Mkt by providing
incentives; this encourages
growth
Circular Flow of G/S & Money:
• Definitions: circular flow, households,
firms
• 4 components:
–Households
–Markets for Resources (Factor Mkt)
–Production of Goods and Services
–Goods and Services Market (Product
Mkt)
Mixed Economies:
• No economy is purely command or freesome are more one than the other
• One advantage is individuals make their
own economic choices but the govt
provides goods and services people
wouldn’t have otherwise
China is mixed on the side of commandthey are in “transition”
Let’s compare economic systems (see
American Free Enterprise:
Goals of US economy* full employment- jobs for all who are able
* economic growth- higher standard of
living (defn)
Gross Domestic Product (total value of all
G&S produced in an economy) is one tool
we use to measure economic growth/
business cycle (defn)
* stability
* freedom
* security
* equality
* efficiency
Free market needs govt intervention to
provide what the mkt can’t/ ex??
Free mkt encourages economic growth.
Government’s Role in Free Mkt:
• Do they have one? If so, what and to what
extent? Is public interest their job?
• Do they ever go beyond the boundaries?
• Is it fair to say, “majority rule but minority
rights?”
• Is it right?
• To what extent are we a mixed economy?
• Should the govt intervene in the economy in an
effort to make it better? Does this sacrifice any
of our rights?
• Providing Public Goods:
–Public good (defn) a shared good or
service for which it would be inefficient
or impractical 1) to make consumers
pay individually and 2) to exclude
nonpayers
ex: roads, bridges, dams, space
program
What would happen if you had to pay to
have a road built in front of your house?
–private good (defn) goods that provide
benefit only to the purchaser; these
goods are produced b/c of the incentive
the producer receives for it
–Free rider problem: people benefit from
a G/ S & would not choose to pay for it
ex: Would you be willing to pay equally
for your share of the costs associated
with running the military?
Providing a Safety Net:
• Why should we provide a safety net for those
who can’t seem to support themselves?
• As a society, we recognize some
responsibilities to the very young, very old, sick,
poor, and the disabled. They deserve to have
at least a minimal standard of living.
• Govt attempts to do this by redistributing
income through taxation and welfare programs
such as cash transfers (social security,
worker’s comp, unemployment), in-kind
benefits (food stamps, WIC, legal aid, housing),
medical benefits, and education benefits