1. Every society has an economic system to allocate goods and services.
Chapter Intro 2

2. Traditional Command Market Economic Systems
All societies use an economic system to provide for needs and wants of their people.
Three major economic systems exist:
Traditional
Command
Market
Comparing Economic Systems
Section 1

3. Most economies combine elements of the three.
Economic Systems (cont.)
Most economies combine elements of the three.
Comparing Economic Systems
Section 1

4. Traditional Economies (cont.)
A traditional economy—use of scarce resources and economic activity is based on habit or custom.
Section 1

5. Everyone knows which role to play.
Traditional Economies (cont.)
Advantages
Everyone knows which role to play.
Little uncertainty on what or how to produce.
Customs and traditions determine who is provided for.
Section 1

6. Individuals generally not free to make decisions
Traditional Economies (cont.)
Disadvantages
Individuals generally not free to make decisions
New ideas discouraged, leading to stagnation and a lower standard of living
Strict rules defined by elders and ancestors
Section 1

7. A central authority makes the major decisions in a command economy.
Command Economies (cont.)
A central authority makes the major decisions in a command economy.
Section 1

8. Can change direction drastically through emphasizing/allocation
Command Economies (cont.)
Advantages
Can change direction drastically through emphasizing/allocation
Health and public services available to everyone at little or no cost
Section 1

9. Basic wants and needs of consumers are ignored.
Command Economies (cont.)
Disadvantages
Basic wants and needs of consumers are ignored.
Economies tend to be unproductive, not producing a good product.
Large decision-making bureaucracy lacks flexibility.
Section 1

10. Severely limits private property rights
Command Economies (cont.)
Severely limits private property rights
Individual freedom and initiative are limited.
Section 1

11. Market Economies (cont.)
A market economy allows people to make decisions in their own best interest.
Buyers and sellers exchange goods and services in a market.
Market economies are based on capitalism.
Capitalism means that the factors of production are privately owned.
Section 1

12. Self-Regulating Market (Adam Smith)
Self-interest is the motivating force in the free market.
Producers in a free market struggle for the dollars of consumers. This is known as competition, and is the regulating force of the free market.
The interaction of buyers and sellers, motivated by self-interest and regulated by competition, all happens without a central plan. This phenomenon is called “the invisible hand of the marketplace.”

13. Free Market – Circular Flow
monetary flow
physical flow
Circular Flow Diagram of a Market Economy
Households
Firms

14. High degree of individual freedom
Market Economies (cont.)
Advantages
High degree of individual freedom
Adjusts gradually to change over time
Small degree of government interference
Section 1

15. Market Economies (cont.)
Decision making is decentralized
Large variety of goods and services
High degree of consumer satisfaction

16. Not everyone is provided for
Market Economies (cont.)
Disadvantages
Not everyone is provided for
May not provide enough of some basic goods and services
High degree of uncertainty for workers and employers
Section 1

17. What is wrong with a pure market economy?
Modern Economies
What is wrong with a pure market economy?
Many early economists believed in a laissez faire philosophy… or a “hands off” approach to the market
Over time, society’s needs and wants became such that government rules became necessary

18. Mixed Economies (cont.)
Most economies in the real world are mixed economies.
When political systems are considered with economic systems, the picture gets more complicated.
An example is socialism and its extreme, communism.
The Spectrum of Mixed Economies
Section 1

19. Government’s Role in a Mixed Economy
The government purchases land, labor, and capital from households in the factor market, and
Purchases goods and services in the product market.
monetary flow
physical flow
Circular Flow Diagram of a Mixed Economy
Households
Firms
Product market
taxes
government purchases
Government
expenditures
government-owned factors
taxes
Factor market

20. Mixed Economies (cont.) Advantages
Provides assistance for some people who might otherwise be left out
In a democratic society, voters use electoral power to affect WHAT, HOW, and FOR WHOM decisions.
In a socialist society, FOR WHOM is addressed more directly by government.
Section 1

21. More services mean higher costs for citizens overall.
Mixed Economies (cont.)
Disadvantages
More services mean higher costs for citizens overall.
In socialist countries, availability of services may be limited or quality deteriorates over time.
Section 1

22. American Free Enterprise (cont.)
Capitalism and free enterprise are often used interchangeably, although meanings are different.
Capitalism stands for the private ownership of resources.
Free enterprise is the unhindered use of privately owned resources to earn profits.
Section 3

23. Characteristics of Free Enterprise Capitalism (cont.)
There are five major characteristics of a free enterprise economy:
Economic freedom
Voluntary exchange
Section 3

24. Characteristics of Free Enterprise Capitalism (cont.)
Private property rights
Private property gives individuals incentive to work, save, and invest.
Profit motive
People are free to take risks to earn a profit.
Competition
Section 3

25. The Role of the Consumer (cont.)
Consumers ultimately determine which products are produced.
If consumers like a new product, producers are rewarded with profits.
Consumers not purchasing a product can cause a firm to go out of business.
Section 3

26. The Role of the Consumer (cont.)
The phrase “the customer is always right” recognizes consumer sovereignty.
Consumers are always looking for new ideas and products.
Section 3

27. The Role of the Government
Government has become
A protector
Provider
Regulator
Consumer
Section 3