Economic Systems American Government

Three Economic Questions What goods and services will be produced? How will they be produced? Who gets the stuff?

3 Economic Systems Economic system (economy) – an organized way of providing for the wants and needs of people. 1). Command 2). Market 3). Traditional

Command Economies Economic activity is planned out by the government, with people having little influence. (Communism) Examples: Cuba North Korea Former Soviet Union

Command Economies - Pros Allows an economy to change direction very quickly. After Stalin’s first two Five Year Plans, Russia moved from a rural agricultural economy to an industrial economy. Little uncertainty as to who will do what. No unemployment because the government gives everyone a job (whether it is needed or not).

Command Economies - Cons Not designed to meet the wants of consumers. Provides little to no incentives Do just enough to meet quotas. No rewards for individual performance.

Market Economies People and businesses act in their own best interests to answer the three basic economic questions.

Market Economies – How they work Lure of personal and financial gain leads consumers and businesses to interact in various markets. Each person acts in their own best interest.

The First Economist – Adam Smith “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” – Wealth of Nations, 1776

Market Economies - Pros Economy can adjust to change over time Businesses can adapt to changing consumer tastes by creating new/different products. High degree of individual freedom Businesses and individuals are free to do what they want. Economic decisions are made by all, not limited to government officials. Seemingly unlimited variety of goods and services available to consumers.

Market Economies - Cons Does not provide for the basic needs of everyone. Elderly, disabled and other groups would be unable to survive in a market economy without governmental assistance. Does not provide certain services that people value. (Education) High degree of uncertainty (Recessions & unemployment)

Traditional Economies Economic activity is based on tradition with roles determined by previous generations. Examples: Medieval Europe Various hunting tribes in Africa and northern Canada

Traditional Economies – Pros Everyone knows what their role is. Life is generally predictable and stable.

Traditional Economies - Cons Discourages new ideas and new ways of doing things. Lack of progress leads to a lower standard of living.

The US Economic System Mixture of command and market economy “Capitalism” Based on 4 important principles Private Property Freedom of choice Profit Competition

Economic Goals Economic Freedom Economic Equity Economic Security Price Stability

Economic Freedom Individuals have freedom to choose their own occupations, employers, and spending habits. Businesses have freedom to choose how and where to produce goods/services.

Economic Equity People should receive adequate pay for the work they perform. People should all have the same opportunities to get ahead. Are we meeting this goal?

Economic Security We should have protection from negative economic events such as layoffs and injuries. Social Security – federal program that provides disability and retirement benefits. Everyone should have their basic needs met. Are we meeting this goal?

Price Stability We should have stable prices that protect against inflation. Inflation – a rise in the general level of prices. Are we meeting this goal?