Economic Systems

Three Key Economic Questions What goods and services should be produced? How should goods and services be produced? Who consumes the goods and services?

Economic Goals and Societal Values Economic Efficiency Economic Freedom Economic Security and Predictability Economic Equality Economic Growth and Innovation

Three Kinds of Economies Traditional Market Command Based on tradition and religion Centralized authority Little innovation Little govt involvement Production driven by demand- the invisible hand Competition Private ownership of means of production Income inequality Innovation Govt control of economy State owned enterprises Central authority chooses what to make No competition Income equality Stagnation

Creating your own system You have just landed on a desert island and you need to decide which kind of economy to put in place. Some of you will represent the Market Economy camp and some will represent the Command Economy camp. To create your system, you will need to take the following steps and answer the following questions:

Creating your own system Step 1: Prioritize your economic goals Step 2: Answer the following questions Who decides how resources will be allocated? Who owns the factors of production? Who determines what goods and services will be produced? Who determines prices? How is income distributed? Must all members contribute equally? What is the role of “government” in the economy?

Free Market Circular Flow Model

Self Regulating Nature of the Free Market Self Interest is the motivating factor Incentive for consumers to find lower prices and for firms to make higher profits leads to competition Encourages innovation that leads to economic growth through creative destruction Self Interest and Competition regulate the market place to produce the highest quality goods at the lowest possible prices

The big failing of the Free Market Competition and Creative Destruction!!!

Mixed Economy Circular Flow Model

Benefits of Mixed Economies Deals with the free rider problem Can overcome market failures Overcome the vicissitudes of the market through redistribution (Welfare, Social Security, Disability, Workers Compensation, Medicare)