Economic Systems Three Basic Questions Due to scarcity, individuals, governments, and businesses, must make decisions about what to produce. The type of economic system that a nation uses will dictate who makes these decisions. Question 1: What Should be Produced? Question 2: How Should It be Produced? Question 3: For Whom Should It be Produced? Chapter 2 Section 1

Societies use their scarce resources to satisfy unlimited wants Economic Systems Traditional Economy Command Economy Market Economy

Traditional Economies

AdvantagesDisadvantages Low productivity New ideas discouraged “pursuit of happiness” discouraged Lower standard of living Roles are clearly defined Life is stable, predictable, continuous Little or no uncertainty Traditional Economies

Command Economies SocialismCommunism Who owns the resources? How are resources allocated? What role does government play?

Karl Marx  Major Accomplishment: Detailed analysis of capitalism and foundation for socialist economic theory in two famous works The Communist Manifesto (1848) and Das Kapital (1867, 1894)  Famous Quotation: “Workers of the world, unite! You have nothing to lose but your chains.”  Influenced: Russian Revolution (1917), Chinese Revolution (1979)

What is a Market?  It is any place or situation in which people buy and sell resources, goods, and services  It is based on the voluntary exchange of goods and services.  Price is the determining factor for what will be produced, how it will be produced, and for whom it will be produced.

Adam Smith Founder of Classical Economics “Every individual… intends only his own gain, and he is in this, as in many other cases, led by an invisible had to promote an end which was no part of his intention.” From Wealth of Nations Individuals pursue their own self interest Free markets Limited regulation by the government

Private Property must be actively enforced by law guarantees the owner the right to exchange the property for some other gain Limited Government Involvement Laissez-faire Capitalism: producers act on their own to provide goods and services that consumers demand Voluntary Exchange Both sides believe they are getting a deal Competition & Consumer Sovereignty All sellers in a market will try to get buyers to purchase their products. Consumers are free to purchase what they want and therefore have ultimate control over what is produced Specialization Buyers and sellers are able to concentrate their efforts in areas where they have an advantage Fundamentals of a Market Economy

cnc11/resources/htmls/animated_economic s/ec02_anim_circflow.html Circular Flow Model

Four Basic Types of Economic Systems  Traditional  Command  Market  Mixed

John Stuart Mill His ideas formed the basis of a mixed economy system Goal of Utilitarianism: ” “ The distribution of wealth…depends on the laws and customs of society…. Society can subject the distribution of wealth to whatever rules it thinks best.” In Principles of Political Economy (1848) he emphasized Production and distribution as separate processes Distribution regulated by the government in order to achieve the utilitarian goal Utilitarianism: the idea that society should adopt policies promoting “the greatest happiness of the greatest number

Discuss  How is the United States’ economic system a mixed economy?  How does it embody the goal of utilitarianism?

Characteristics of the American Economy American Economy Private Property Competition Limited role of government Freedom of Enterprise Freedom of Choice Profit Incentive