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Chapter 2 Economic Systems Answering the 3 Basic Economic Questions Every economy is trying to find the best way to distribute scarce resources.

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Presentation on theme: "Chapter 2 Economic Systems Answering the 3 Basic Economic Questions Every economy is trying to find the best way to distribute scarce resources."— Presentation transcript:

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2 Chapter 2 Economic Systems

3 Answering the 3 Basic Economic Questions Every economy is trying to find the best way to distribute scarce resources

4 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?

5 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)

6 Market Capitalism Individuals own resources and means of production Basically free from government control Adam Smith

7 Market Capitalism Goal: to motivate people through economic reward People keep the profits from their hard work Adam Smith

8 Market Capitalism Characteristics Private Property Private Property Freedom of Choice Freedom of Choice Self-Interest Self-Interest Profit Motive Profit Motive Supply and Demand Supply and Demand Competition Competition Limited Government Limited Government Adam Smith

9 Market Capitalism Examples : U.S., Australia, South Africa, Chile Political System : Democracy Adam Smith

10 Traditional Economy does things as it always has

11 Traditional Goal: to maintain the same tradition Methods: resist new technologies

12 Traditional Examples: the Amish in the U.S., tribes living within developed countries Political System: Tribal Organization

13 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.)

14 Market Democratic Socialism Goal: Equal distribution of income Methods High Taxes High Taxes Benefits paid to low income individuals Benefits paid to low income individuals

15 Market Democratic Socialism Examples: Norway, Mexico, Canada Political System: Socialistic Democracy

16 Authoritarian Socialism (Communism) Government owns all property Total government control of the economy Karl Marx

17 Authoritarian Socialism (Communism) Goals: equal distribution of income with no social classes Karl Marx

18 $1000$10,000 Ive made $8950! $50 Pay Surplus Value $9000 This really bites!

19 Authoritarian Socialism (Communism) Methods Working class revolts against the rich owners Working class revolts against the rich owners One political party controls all government planning One political party controls all government planning Karl Marx

20 Authoritarian Socialism (Communism) Characteristics Public Ownership Public Ownership Centralized Decision Making Centralized Decision Making Economic Planning Economic Planning Allocation by Command Allocation by Command Karl Marx

21 Authoritarian Socialism (Communism) Examples: Old Soviet Union, Cuba, North Korea Political System: Totalitarian Communism Karl Marx

22 Authoritarian Socialism (Communism) Key Terms from Communist Manifesto Proletariat – the average worker who (according to Marx) is exploited by capitalism Proletariat – the average worker who (according to Marx) is exploited by capitalism Karl Marx

23 Authoritarian Socialism (Communism) Key Terms from Communist Manifesto Bourgeoisie – the rich, ruling class that uses the proletariat to make money Bourgeoisie – the rich, ruling class that uses the proletariat to make money Karl Marx

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26 Free Market vs. Central Planning Free Market Advantages Self-Regulating – produces what is needed and wanted with no government interference Self-Regulating – produces what is needed and wanted with no government interference Free Market Disadvantages

27 Free Market vs. Central Planning Free Market Advantages This self regulating is a result of people acting on self- interest and incentives This self regulating is a result of people acting on self- interest and incentives Free Market Disadvantages

28 Free Market vs. Central Planning Free Market Advantages Competition holds prices to the lowest levels while spurring new invention Competition holds prices to the lowest levels while spurring new invention Free Market Disadvantages

29 Free Market vs. Central Planning Free Market Advantages Consumer Sovereignty – people are free to buy what they want Consumer Sovereignty – people are free to buy what they want Free Market Disadvantages

30 Free Market vs. Central Planning Free Market Advantages Encourages a very high degree of economic growth Encourages a very high degree of economic growth Free Market Disadvantages

31 Free Market vs. Central Planning Free Market Advantages Free Market Disadvantages Economic equity and security do not occur in a purely free market

32 Free Market vs. Central Planning Free Market Advantages Free Market Disadvantages Market has no incentive to build public goods like roads or libraries

33 Free Market vs. Central Planning Free Market Advantages Free Market Disadvantages Spillover costs (negative externalities) – some problems created that effect people who didnt cause them Ex. - Pollution

34 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

35 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


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