03.03.14 03 Economic Systems

Who or what decides what you get?
Who Gets What? How Do
Societies Decide?
 Every society must answer three
fundamental economic questions: what to
produce, how, and for whom?
 In answering the three economic
questions, every society develops an
economic system: a way of coordinating
the production and consumption of goods
and services
Who Gets What? How Do
Societies Decide?
 How societies answer these questions
depends on their economic goals:
 freedom, efficiency, equity, growth,
security, and stability.
 Societies differ in the degree of
importance they attach to each goal.
Progress towards one goal can sometimes
be achieved only at the expense of
Economic Goals
 economic freedom: the ability to make our
own economic decisions without interference
from the government.
 economic equity: the fair and just
distribution of society’s wealth
 What is “fair” and “just”?
 economic growth: when an economy
produces more and better goods and services
Economic Goals
 economic security: basic needs like food,
shelter, and health care are provided for
 economic stability: the goods and services
we count on are there when we want them
 Electricity on demand, grocery stores stocked,
 economic efficiency: an economy makes the
most of its resources, including full
employment (when all who want to work can
find jobs)
Economic Goals
 freedom
 How would you personally rank
these goals in order of
Traditional Economy
Command Economy
Market Economy
The Factor Market
 In the factor market, households sell their
land, labor, and capital to firms.
 factor payments: the funds paid to
households in exchange for these factors
 If you have ever received a paycheck, you received
a factor payment.
Mixed Economy
 Today, all economies are mixed economies in
which the government takes some role.
 At minimum, they establish a legal system to
enforce laws, and a stable system of currency.
 They can also step in to regulate firms to ensure
worker and consumer safety, limit pollution, etc.
 Finally, they can provide certain goods or services
that the market otherwise would not – things like
public works (dams, highways, sewer systems,
Government’s Role
 In addition to public works and services, the
government in many countries also provides
payments like social security and welfare
checks, food stamps, etc.
 transfer payments: money, collected in the
form of taxes and paid to others by the
government in the form of benefits
The Mixed Economy Continuum
 Mixed economies vary in their degree of
freedom – from free to repressed.
 In 2008, the Heritage Foundation and the
Wall Street Journal published their annual
Index of Economic Freedom…
A Free Enterprise System
A Free Enterprise System
… no, not that Enterprise.
A Free Enterprise System
 In a free enterprise system, as in the United
States, individuals own the factors of
production and make decisions about how to
use those factors within the framework of the
 Seven key characteristics: economic freedom,
competition, equal opportunity, property
rights, binding contracts, profit motive, and
limited government
A Free Enterprise System
What It Means
Why It’s Important
Economic Freedom
People are free to
make their own
economic decisions
It is the essence of
free enterprise!
Producers of similar
compete for buyers
Provides a choice,
lowers prices,
improves quality
Equal Opportunity
Everyone has the
same starting point
Gives everyone the
same chance to
Binding Contracts
Agreement between
two parties to hold
up their end of the
Make sure everyone
gets what is agreed
A Free Enterprise System
What It Means
Why It’s Important
Property Rights
You are legally
entitled to your stuff
Protects your stuff
Profit Motive
Desire to make
Promotes growth of
business and the
Limited Government
Just enough
government to
preserve and protect
free enterprise
Preserves and
protects free
The Power To Choose
 What economic changes does Estonia's
former prime minister argue gave his country
one of the freest economies in the world?
 Which economic change do you think was
most crucial in Estonia's case?