1. Economic Systems
CHAPTER TWO

2. 3 Basic Questions What goods and services should be produced?
How should these goods and services be produced?
Who consumes these goods and services?

3. What to Value?
Economic System – method used by a society to produce and distribute goods and services
Easiest way to distinguish an economy is by who answers the basic questions OR owns and controls the factors of production
Dependent upon that society’s goals and values.
What should a society value?
What do you value?
Do different societies have different values?

4. Goals & Values
Economic Efficiency – maximize what you can get with what you have to work with.
Economic Freedom – be able to make your own decision from a variety of choices.
Economic Security – knowing you can find the goods/services that you need.
safety net – set of government programs that protect people experiencing unfavorable economic conditions
Economic Equity – does everyone get the same?
Economic Stability
Economic Growth – the economy must grow for a nation to improve.
standard of living – level of economic prosperity

5. Traditional Economies
Relies on habit, custom,
or tradition to answer
the 3 basic questions.
OR the village controls the factors of production--resources are shared
Everything revolves around
family
Your occupation would be what your ancestors have always done
Small and close communities that engage in subsistence agriculture

6. Traditional Society ADVANTAGES Simple, natural, caring DISADVANTAGES
Struggle to cope with large disasters
Slow to adapt to change
Lack modern conveniences
No social mobility

7. Market Economies
Individuals answer the basic questions based on exchange or trade.
Factors of production are privately owned
Choices determine what is produced and who gets it.
Also referred to as the
Free Market or Capitalism.

8. Why Engage in Exchange?
Self-interest motivates people to exchange and trade
By looking out for their own utility (getting what they want) society becomes better off
Producers seek greater profit, workers higher wages, consumers the best deal
Competition regulates the market and keeps it reasonably fair
Producers seek profit and low costs
Consumers seek the best deals to satisfy their wants and needs

9. Incentive – ways of altering behavior (taxes, punishment, candy)
Economists believe few problems cannot be solved by the right incentives
Invisible Hand – phenomenon by which a market operates fairly without planning
Consumers get what they want, as do producers

10. Free Market
Market – arrangement of buyers and sellers to exchange things.
Flea market, ebay
Specialization – makes businesses and the economy more productive and efficient
Households / individuals own the factors of production
Markets organize trade and exchange in a non-fraudulent way
Allows all parties to benefit
“The meaning of economic freedom is this: that the individual is in a position to choose the way in which he wants to integrate himself into the totality of society.” ~Ludwig von Mises

11. Factor & Product Markets
All economic transactions take place on one of two markets
Factor market – resources are bought and sold (raw)
Rent, land, labor
Product market – where goods/services are purchased by households (cooked)

13. Raw vs. Cooked Factors of production Resources “Raw materials”
Goods and services
Ready to be bought and sold
“Finished products”

15. Free Market Advantages
Efficiency – highly productive and responds rapidly to change
Freedom – work, produce, consume how/want you want
Potential for Growth – creative destruction, innovation
Consumer Sovereignty – “customer is king”
If anyone rules the free market, it is the consumer
If you don’t like it—don’t buy it!

16. Free Market Disadvantages
Vast amounts of inequality and insecurity
Greater chance of failure
OR wealth is spread unevenly
Not only is a large percentage of the population in poverty, but a disproportionate amount of the population holds the majority of the wealth

17. Command Economies Central government answers basic economic questions.
Government controls the resources
Distribution based on equity
No choices given to
people.
Elite inner circle of planners decide what & how much gets made along with how much to charge for it
Thus the name “Central Planning”
Stalin at the Helm

18. Centrally Planned Economies
Government controls factors of production and wages, sets prices and output goals
Communism - (authoritarian) complete governmental control
Socialism – blend of centrally planned and free market systems
includes high degrees of regulation, high taxation, large safety nets and some economic planning

19. Disadvantages: Central Planning
No efficiency
Poor quality, shortages
Performance never meets ideals
Lack of incentives
No innovation or profit, no private property, price controls
Sacrifice of individual freedoms
Gov’t decides what industries are essential

20. Advantages: Central Planning
No competition
Few business failures and few mega-rich citizens
Basic security
Essential amounts of most necessities are available
Ex: healthcare, cooking oil, bread…
General equality
Majority of population experiences a similar life
No class divisions, jobs for most
Wealth theoretically spread more evenly

21. Mixed Economies Market-based economy
with government making some decisions
Good deal of control and regulation
Most modern economies are mixed.
China, India, the US

22. Modern Economies
Transition – economies typically moving from centrally planned to free-market are characterized by a few observations:
Privitization – businesses are transferred from state (gov’t) control to individuals, allows for competition
Less nationalization—fewer state-run firms
Respect for rule of law and private property
Encourages outside investment

23. Bovine Economics
COMMUNISM: You have two cows. The government takes both and gives you some of the milk.
SOCIALISM: You have two cows The government takes one cow and gives it to your less fortunate neighbor.
TRADITIONAL: You have two cows; you want chickens; you set out to find another farmer who will trade eggs for milk.
CAPITALISM: You have two cows. You sell one and buy a bull.