1. Economic Systems Chapter 2

2. Terminology Economic System 3 Key Questions 5 Economic Goals
Traditional Economy
Free Market Economy
Capitalism
Laissez-faire
Competition
Centrally Planned Economy
Mixed Economy

3. Economic System
Method used by a society to produce and distribute goods and services…the way a country distributes its resources
Which economic system a society uses depends on the society’s goals and values

4. 3 Key Questions Because resources are limited, every society must answer these three questions
What goods & services should be produced? Food and shelter – modern societies…national defense, educ. Etc.
How should we produce those goods & services? Electricity via solar or nuclear power?
Who consumes those goods & services? Car, public transportation…bologna vs. steak

5. 5 Economic Goals Economic Efficiency 8 track example
Economic Freedom child labor laws
Economic Security and Predictability eggs and gas…safety nets (unemployment, food stamps, etc.)
Economic Equity How do we divide the economic pie? Equally or not?
Economic Growth and Innovation The economy must grow to keep everyone working – efficiency – China example

6. Economic systems differ as to
1. who owns the factors of production

7. A Traditional Economy
In a traditional economy, people live and work as their ancestors lived and worked
Little or no room for innovation or change
Low standard of living
Subsistence farming
Hunters and gatherers
Barter instead of money
Have not experienced the Industrial Revolution

8. Traditional Economy

9. Traditional Economies
Latin America
Haiti
Africa
Chad
Asia
Bangladesh

10. Free MARKET Economy Capitalism
A market is an arrangement that allows buyers and sellers to exchange things.
A market exists because no one is self-sufficient – we cannot produce everything we need because resources are limited…thus globalization
Specialization – a nurse provides care, a mechanic fixes cars…it is easier to learn one task instead of many…think assembly line

11. A Free Market Economy Capitalism
In a free market economy, people are free to buy and sell whatever their money allows.
The government does not interfere in the business of business. Laissez-faire (no safety net) “let it be”
The individual has complete economic freedom.
No true example

12. Free Market Economy Adam Smith, Wealth of Nations, 1776
The Market is SELF REGULATING INCENTIVE Drives COMPETITION This happens without any government direction thus the “invisible hand of the marketplace” COMPETITION BETWEEN FIRMS The Invisible Hand

13. Free Market/Capitalism
Very Important Point:
In a free market/capitalistic society, private individuals and firms own the land and capital as opposed to the government
Private property rights encourage investment, innovation, and economic growth…in other words…INCENTIVE

14. Free Market Economy ADVANTAGES Economic efficiency Economic freedom
Economic growth
Wide variety of goods and services
What are some DISADVANTAGES?

15. Command Economies AKA: A Centrally Planned Economy
In a centrally planned economy, the government makes all economic decisions in hopes to have equality for all citizens.
The government answers the three key economic questions (what will be produced, how they will be produced, and who consumes them).
In other words, the government controls the factors of production…NO FREEDOM

16. Command Economies
Examples include Cuba and North Korea

17. Communists advocate centrally planned
economies.

18. Command Economies

19. Command Economy Smurfs Problems with a command economy include:
Lack of incentive = lack of innovation and quality
Cannot meet consumers’ wants or needs

20. Command Economies
Karl Marx is considered the founder (just like Adam Smith is for Market Economies)
The Communist Manifesto, 1848
Called for a centrally planned economy with all economic and political power resting gin the hands of the central government via a violent revolution.
Bolsheviks

21. A Mixed Economy Modern nations have mixed economies.
A mixed economy combines elements of the other three economic systems.
However, it is important to remember that nations mix their economic systems differently.

22. Mixed Economy (Examples)
Lone Star Card
FAFSA
Eminent domain (highway system)
Patents

23. Writing Assignment CHOOSE 2
Write one paragraph (5-7 sentences) explaining how your life would be different if you lived in a country that practiced a traditional economy.
Write one paragraph (5-7 sentences) explaining how your life would be different if you lived in a country that practiced a command economy.
Write one paragraph (5-7 sentences) providing examples of how your life is influenced by the mixed economy in which you live.