1. Economic Systems

2. Three Economic Questions
What goods and services will be produced?
How will they be produced?
For whom will they be produced?
By applying these three questions to different countries, you can gain insight about these societies.
Every economic system revolves around these three questions

3. Distinguishing among systems
Standards used to distinguish among economic systems are:
Who owns the resources
What decision-making process is used to allocate resources and products
What types of incentives guide economic decision makers

4. Pure Market Economy All resources are privately owned
Economic activity is based on the prices that are generated in free, competitive markets (this includes voluntary exchange) which encourages inventions and innovations
Price is determined by unrestricted supply and demand
any income derived from selling resources goes exclusively to each resource owner

5. Adam Smith Laissez Faire economics: no government interference
Believed market forces coordinate production as if by an “invisible hand” which he wrote about in his book Wealth of Nations
Means that a true market naturally leads to efficient results and will correct any inequalities in resource allocation

6. Problems Difficulty enforcing property rights (NO govt. involvement)
Some people have few resources to sell
Some firms try to monopolize markets
No public goods (costs and benefits that are shared by everyone, public parks)
Externalities (effects on third parties or from outside sources)(Pos. – vaccinations, Neg. – pollution, natural disasters)

7. U.S. Market Economy (Capitalism)
Buyers and sellers come together to answer the three fundamental economic questions (through voluntary exchange), and own the factors of production
Supply: sellers determine what good or service to produce and part with at different price levels
Producer supplies goods and services with profit as incentive
Demand: buyers determine how much of a good or service they are willing to buy at different price levels
Consumers buy the goods and services with the cheapest price as the incentive, competition, freedom of choice

8. Problems
Less security because it does not have a plan for distribution of wealth (unless the govt. steps in)
Explains why there are extremely rich and extremely poor
Greater risk of business failure
Little govt. regulation or control which does not guarantee jobs or income

9. Role of Government in Market-Economy
Provides public goods (national defense, police and fire protection) paid for through taxes
Redistributes income (taxes, welfare programs)
Resolves market failures (New Deal programs)
Anti-trust laws – used by the government to prevent business from setting prices (monopolies)
Tariffs (tax on foreign imports)
Subsidies (government assistance/money paid to businesses)
Transfer payments (social security, Medicare, Medicaid)
Consumer protection laws
Protection of property rights (patents)
Deregulation of an industry (airlines in 1970s)

10. Command Economy (Central Planning)
Opposite of market economy (Cuba, former Soviet Union)
Government commands all markets
Govt. decides what, how, and for whom (owns factors of production), allows for more equal distribution of wealth
Since govt. is in charge of everything, citizens should receive equal amounts of basic goods and services; however it often leads to scarcity of needs (bread) or public goods and surplus of unnecessary goods
Govt. provides for its citizens (job security but no advancement)
Consumer and personal freedoms are not great

11. Problems Private ownership is minimal Consumers get low priority
Little freedom of choice
Little profit motive
Can be inefficient (slow to react to demand)
Resources owned by the state are sometimes wasted
Environmental damage (industrialization)
Does not reward hard work or special skills, no incentives

12. Traditional Economy Production is based on customs and tradition
Status quo – if something worked for one generation, it will work for the next
May slow down economic progress and growth
Survival is based on subsistence agriculture (farming)
Little opportunity for economic advancement

13. Mixed Economy Have elements of more than one system
**Most economies are mixed**
China combines elements of market and command economies
U.S. has a mixed economy, capitalistic with limited government involvement (taxes, regulations)
Government produces public goods (roads) and private firms produce consumer goods (final use)
The government regulates the private sector and provides equal opportunity by protecting private property

14. Transitional Economy
Is in the process of shifting from central planning to competitive markets
Involves converting state-owned enterprises into private enterprises – privatization (collapse of communism under the Soviet Union)