1. Chapter 3
Economic Systems

2. Who Gets What?
Larger and more advanced a society is, the more numerous & complex the choices will be

3. Three Fundamental Economic Questions:
What goods & services are to be produced?
What goods & services are most wanted & needed
How are goods & services to be produced?
Each society has to decide for itself the answer to this question

4. Three Fundamental Economic Questions:
For who are goods & services to be produced?
Who deserves what
Ability to pay
Equal distribution
First come, first serve
Distribution according to need

5. Six Economic Goals
Economic freedom – the ability to make our own economic decisions without government interference
Economic efficiency – makes the most of society’s resources with little waste
Greatest number of consumers get what they want
Economy strives for full employment
All who want to work can find jobs

6. Six Economic Goals
Economic Equity – fair & just distribution of a society’s wealth
Economic growth – the economy, over time produces more and better goods & services
Economic growth leads to an improved standard of living
Key element is scientific & technological innovation

7. Six Economic Goals
Economic security – provide less fortunate members with support they need (food, shelter, & health care) to live decently
Economic stability – goods & services we count on (electricity, food, & clothing) are there when we want them
Goals can at times conflict with one another

8. Differences in Economic Systems
Economic system – the way society coordinates the production & consumption of goods & services
Traditional economy
Command economy
Free market economy
Mixed market economy

9. Differences in Economic Systems
Traditional economy – customs & tradition dictate what to produce, how to produce it, and for whom
Agrarian society – farming, herding, fishing, hunting, and gathering
Labor is divided among gender
Social hierarchies decide for whom goods are produced for

10. Differences in Economic Systems
The goals of traditional economies are stability and security

11. Command Economy
Command economy – decisions about what , how, and for whom to produce are made by a powerful ruler or ruling elite
The goal of ancient command economies was to accumulate wealth & goods for the ruling class
The goal was to preserve economic stability

12. Market Economy
Market economy – decisions are made by the individual producers & consumers
Free market economy – the workings of the market are not planned or directed
No single person, business, or government agency has control of the market
Decisions are made voluntarily, one at a time by millions of individuals guided by self-interest

13. Market Economy
The goals of a market economy are freedom and efficiency
Producers make goods & services based on consumers’ spending decisions
Individuals are encourage to pursue jobs that allow them to make the most of their human capital
Markets coordinate trade principle – John Adams “invisible hand”

15. The Flow of Money & Goods
Circular flow model –
Households
Sell factors of production
Pay for goods & services
Firms
Pay for factors of production
Sell goods & services

16. The Flow of Money & Goods
Households – person or group of people living together
Firms – organization that use the factors of production
Product market – goods & services are sold by firms & purchased by households
Factor market – Households sell their factors of production to firms

17. The Flow of Money & Goods

18. The Flow of Money & Goods
Factor payments – funds paid to households – rent, wages, interest, or dividends
Firms employ people so they can make things to sell
People work to buy things
Market is controlled by individual self- interest – “invisible hand”

19. Capitalism, Socialism, & Communism
1750s Industrial Revolution begins
Capitalists – investors and factory owners that acquired the factors of production & became wealthy
Capitalism = free market system
Rich get richer & poor get poorer
1848 economist Karl Marx & Friedrich Engels – The Communist Manifesto

20. Capitalism, Socialism, & Communism
Socialism – political & economic policy that calls for the state ownership of the factors of production for the benefit of all
“Revolt against the capitalist pigs!”
National ownership of industry would lead to equal distribution of income
Communism – political & economic system where all property is owned by all members of society

22. Capitalism, Socialism, & Communism
Government is no longer needed to keep order
Instead of “self-interest” society would be guided by “from each according to his ability, to each according to his need”
Workers’ paradise

24. Modern Command Economies
1917 Russian Revolution
Revolutionaries formed an authoritarian government
Pursued social reforms by brute force
Union of Soviet Socialist Republic – first modern command economy
Economic planning – done by government committees of economists, production experts, and political officials

26. Modern Command Economies
Planning committees could not keep track of the millions of products & prices
Chaos in the Soviet system
Shortages were common
Very little variety and choice was limited
Little incentives
Wendy's Commercial - Soviet Fashion Show - YouTube
Wages were determined by committees instead of performance & output

27. Modern Command Economies
No rewards for innovation or increase in productivity
Production was slow
Workmanship was poor & products were inferior to products produced in a market economy
Soviet Union’s goals were economic equity & economic security
But Soviet citizen had nothing to buy

29. Mixed Economies
Mixed economy – both government & individuals play important roles with regard to production & consumption
Government is needed to establish institutions that enable the market to operate – government regulations
Child labor laws
Air pollution standards
Safety & protection laws

30. Mixed Economies Government provides public works Dams Sewers Highways
Bridges
Water lines
Electrical systems
No one person or firm could afford to build

31. Mixed Economies What government provide varies from country to country
Canada & Europe – health care
USA has Obama care
Transfer payments – social security checks, welfare payments, and unemployment benefits

32. Mixed Economies

33. Mixed Economies

34. Mixed Economies Free Mostly free Moderately free Mostly unfree
Repressed
Not ranked
157 nations ranked

36. Mixed Economies 6 countries were considered free
Australia, Singapore, Ireland, USA, New Zealand, & Canada (Hong Kong)
All have a mixed economy dominated by free markets
Most have democratic form of government
All are among the wealthiest nations

37. Key Characteristics of US Economic System
Free Enterprise system – individuals own the factors of production & make decisions about how to use those factors within the framework of the law
Economic freedom – buy what you want from whom you want
Firms are free to make what they want, hire who they want, set price & wages

38. Key Characteristics of US Economic System
Laissez-faire economy – economy system free of government intervention
Competition – provides incentive for businesses & individuals to develop better ways of serving the customer
Encourages producers to use resources efficiently and lower costs

39. Key Characteristics of US Economic System
Equal Opportunity – remove barriers to economic opportunity
Removes barriers to education & employment
Binding Contracts – an agreement between a buyer and a seller
A contract is binding – both sides must fulfill their obligations

40. Key Characteristics of US Economic System
Legal system upholds contracts
Property Rights – right to own land, buildings, and goods
Right to use & dispose of one’s property as one chooses
Intellectual property – creations of the mind that have commercial value
Patent – inventor has sole right to make, use, or sell invention for 20 years

41. Key Characteristics of US Economic System
Copyright – creator of literary or artistic work the sole right to reproduce, distribute, perform, & display their work for 70 years beyond the authors death
Patents & copyrights encourage creativity and innovation
Guarantee inventors & artists can make a profit from their creations

42. Key Characteristics of US Economic System
Profit – money earned by a business after subtracting its costs of operations
Profit motive – profits are the incentive to work or start businesses to make money
Limited Government – limited government control in the economy
Protecting property rights & contracts
Promoting the general welfare

43. Key Characteristics of US Economic System
Preserving competition
Protecting consumers, workers, and the environment
Stabilizing the economy