Economic Systems Compare different types of economic systems: traditional, free enterprise, command and mixed.

3 questions  What to produce  How to produce it  Whom to produce it for

5 Economic Goals Economic efficiency Economic freedom Economic growth & innovation Economic security Economic equity Market economy addresses first 3 goals

Mixed Economy  Government intervention helps meet the economic goals of Security-safety against layoffs, protection against injury-OSHA-, natural disasters Equity-monopolies, property rights, patents, copyrights

Why Economic Systems?  Nations use economic systems to determine how to use their limited resources effectively.  Primary goal of an economic system is to provide people with a minimum standard of living, or quality of life.

Different types of Economic Systems  Traditional Economy  Market Economy (free enterprise)  Command Economy  Mixed Economy

Traditional Economy  Found in rural, under-developed countries– Eskimos & Indian tribes  Customs govern the economic decisions that are made  Farming, hunting and gathering are done the same way as the generation before  Little innovation or change  Advantages: people have specific roles; security in the way things are done  Disadvantages: Technology is not used; difficult to improve

Market Economy (Free Enterprise)  Also called Free Market or Free Enterprise Economy  Businesses and consumers decide what they will produce and purchase and in what quantities  Decisions are made according to law of supply & demand  Supply and demand of goods and services determine what is produced and the price that will be charged.  Advantage—competition to have the best products and services  Disadvantage—huge rift between wealthy and poor  Note: a true market economy does not exist.

Market Economy  Function because of self-interest (personal gain)  Consumers want to pay the lowest possible price  Competition keeps the prices low  Self interest and competition regulate the marketplace (invisible hand)

Market Economy  Factor Market-land, labor & capital Households supply land, labor & capital Firms pay households for land, labor & capital  Product Market-goods & services Households pay firms for goods and services Firms supply households with goods and services

Command Economy  The government determines what, how, and for whom goods and services are produced.  Two types: Strong Command – where government makes all decisions (communism – China, Cuba) Moderate Command – where some form of private enterprise exists but the state owns major resources (socialism – France and Sweden)  Advantages Guarantees equal standard of living for everyone Less crime and poverty Needs are provided for through the government  Disadvantages Minimal choices Fewer choices of items No incentive to produce better product or engage in entrepreneurship

Mixed Economy  Combination of a market and a command economy  Government takes care of people’s needs  Marketplace takes care of people’s wants.  Most nations have a mixed economy: United States, England, Australia  Advantage—balance of needs and wants met by government and in marketplace  Disadvantage— citizens have to pay taxes