Economic Systems August 19, 2008

Economic System A method used by societies to distribute goods and services Distribution depends on that society’s goals and values

3 Key Economic Questions ? What goods and services should be produced How should these goods and services be produced Who consumes these goods and services ? ? ? ? ? ? ? ? ?

FACTOR PAYMENTS Income people receive for supplying the factors of production

Economic Goals and Values Economic Efficiency Economic Freedom Economic Security and Predictability Economic Equity Economic Growth and Innovation

Centrally Planned & Modern Economies

How is a command economy organized? The central government answers the 3 key economic questions The government controls the factors of production as well Self-interest, competition, and consumer sovereignty are missing

Socialism vs. Communism Coach Ramsey Rules !!!! Socialism  social and political philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout a society Communism  political system characterized by a centrally planned economy with all economic and political power belonging to the central government

Advantages and Disadvantages Guarantees jobs and income; jumpstarts certain industries; can fulfill some production goals Disadvantages: Can’t meet consumer needs & wants; workers lack incentives; no innovation; no flexibility; poor quality of goods; shortages Click Me Now!!!

Modern Economies Most economies today are mixed economies  have elements of both free market and centrally planned economies There are limitations to laissez faire

Comparing Mixed Economies Free enterprise – economic system characterized by private or corporate ownership of capital goods Many economies today are in transition from centrally planned to market based To make this transition, state firms must be privatized

The Free Market

What is a market? An arrangement that allows buyers and sellers to exchange things We have markets due to specialization

Free Market Economy A FME is based on voluntary exchanges in markets In a FME, individuals and businesses own the Factors of Productions

Households & Firms HH  person, or group of people living in the same residence HH own the factors of production Firms  an organization that uses resources to produce a product, which it then sells Transform “inputs”  into “outputs”

Factor Market & Product Market The Factor Market is where firms purchase FOP from households The Product Market shows households purchasing goods & services from firms Circular Flow Model of an Economy

Firms Product Market Factor Market Monetary Flow Physical Flow Households Physical Flow Monetary Flow Factor Market

Adam Smith Wrote The Wealth of Nations, 1776 Argued competition and our self-interest would keep the marketplace functioning The “invisible hand”

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