The Economic System

Fundamental Questions What goods and services should be produced? What goods and services should be produced? How should these goods and services be produced? How should these goods and services be produced? For whom should these goods and services be produced? (Who will consume these goods and services?) For whom should these goods and services be produced? (Who will consume these goods and services?)

Market Economy Decisions on production and consumption are made by private individuals acting as buyers and sellers. Decisions on production and consumption are made by private individuals acting as buyers and sellers. Private property, the profit motive, freedom of enterprise, competition, supply and demand, and consumer choice are important. Private property, the profit motive, freedom of enterprise, competition, supply and demand, and consumer choice are important. Role of government is limited. Role of government is limited. Example: The United States Example: The United States

Problems with a Pure Market Economy Difficulty enforcing property rights. Difficulty enforcing property rights. Some people have few resources to sell. Some people have few resources to sell. Some firms try to monopolize markets. Some firms try to monopolize markets. No public goods. No public goods.

Command Economy All decisions on production and consumption are made by a central government. All decisions on production and consumption are made by a central government. Examples: Nazi Germany and Soviet Union Examples: Nazi Germany and Soviet Union

Problems with a Command Economy All resources government-owned All resources government-owned Production coordinated by the central plans of government Production coordinated by the central plans of government Sometimes called communism Sometimes called communism Little choice in jobs or products Little choice in jobs or products

Traditional Economy Decisions on production and consumption are based upon customs, beliefs, rituals, and habits. Decisions on production and consumption are based upon customs, beliefs, rituals, and habits. Change and growth are slow. Change and growth are slow. Non-industrial Non-industrial Agriculture is usually the main activity. Agriculture is usually the main activity.

Mixed Economy Combines features of more than one of the traditional, command, and market systems. Combines features of more than one of the traditional, command, and market systems. Most economies (including the U.S.) are mixed economies. Most economies (including the U.S.) are mixed economies.

Role of U.S. Government in the Economy Provides public services, regulates economic activity, and promotes economic growth and stability. Provides public services, regulates economic activity, and promotes economic growth and stability. Prior to the Great Depression, the role of government was limited. Prior to the Great Depression, the role of government was limited. Social Security, the Food and Drug Administration, taxes, antitrust legislation, environmental regulations, tariffs, and the Federal Reserve are all example of government involvement in the economy today. Social Security, the Food and Drug Administration, taxes, antitrust legislation, environmental regulations, tariffs, and the Federal Reserve are all example of government involvement in the economy today.