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Economics
Chapter 2 Section 1
Economic Systems
What is an economic system?
What are some types of economic systems that you
may of studied in the past?
Economic Systems

Three basic questions.

What should be produced.

Scarcity
vs,.
Economic Systems
How should it be produced
Vs.
Economic Systems

Who receives goods and services
Vs.
Economic Systems

To answer these questions depends on
how society distributes income or Factor
Payments (income, profit)
Economic Systems Goals

Economic growth

the economy must grow to supply jobs as
populations grow

Innovation .
Economic Systems

Economic efficiency

Society try to get the most out of the resources
available
Economics Systems Goals

Economic Security

All economic systems try to ensure this


Economic Equity



Safety nets
How society doles out goods and services.
Fairly or unfairly
Economic freedom

The ability to make your own economic decisions
Traditional economy.

Traditional economy. Is the oldest and simplest of
economic systems.

People do things as they have in the past





Based off of custom and tradition
Rural areas
Centered on family or tribal group
Change occurs slowly
Standard of living is usually low.
Free market Economy

What is a market?


Why do they exist?


Exchange of goods and services.
They exist because we do not produce all that
we need.
What is specialization?

All people have a specific skill.
Do now.




What are the three questions that economic
systems try to answer?
What are the five goals of each economic
system?
What are the characteristics of a traditional
economy?
Why do we need markets?
Free Market economy

Free market economy:

Based off of Voluntary Exchange)


Voluntary exchange – a transfer of goods and
services, or ideas that someone makes willingly
Use economic freedom to satisfy their wants and
needs.
Free market economy

Participants in a free market economy are
household and firms.


Households own factors of production but are
buyers of goods and services.
Firms uses resources to produce a product or
service for the households
Circular Flow Model
Circular flow

Circular flow shows two markets



Factor market – firms purchase the factors of
production from households
Product market – households purchase goods
and services from firms
Work together to give each other what they
need.
Competition In the marketplace

Adam Smith The Wealth of Nations:

Economy is made up of many exchanges


Buyer and sellers only consider their self interests.
Markets offered incentives or something to make
a person take a certain action.




Person: lower price is an incentive
Firm: a product people want to buy.
Which creates competition
Competition regulates the market
Do now



How does competition regulate a free
market economy?
Who are the participants in a free market
economy?
How does circular flow work in a free
market economy?
Advantages of Free market

Economic Efficiency –


Economic Freedom –



markets change fast according conditions
people work where they want, produce what they want,
people buy what they want.
Consumer Sovereignty – Consumers have much of the
power to decide what gets produced
Economic Growth –

There is competition which allows for innovation.
Disadvantages

Economic equality


Not all goods and services are doled out evenly
Economic security

Not everyone is guaranteed a job.
Centrally Planned Economy or
Command Economy

Centrally Planned Economy – a group of
central planners makes economic decisions
for the Government

Resources and how are they used



What goods and services are to be produced.
Government owns both land and capital
Decide where people will work and how much
they earn
Centrally Planned Economy or
Command Economy

Socialism – is a economic system in which
the means of production are owned by the
state.


Control services for people
Government should own Centers of economic
power
Do now


What is the difference between a
communist nation and a socialist nation?
Who is the father of communism and what
did he write?
Centrally Planned Economy or
Command Economy

Communism – political and economic
system based off of socialism.




Gov’t owns all property
Controls all resources
Gov’t’s Authoritarian
Father of Communism is Karl Marx Communist
Manifesto
Communism

Two warring classes:



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employers and the employees,
Capitalism will destroy itself.
The workers or proletariat would revolt
take control of all production
All people share in the profit.
Soviet Union (U.S.SR.)

Stalin




Plan to boost heavy Industry and agriculture
More Heavy industry, less consumer goods
Communal farms
Became industrialized fast but suffered
shortages for the people
Disadvantages of Centrally Planned
Economy

Economic efficiency



Economic freedom


Few incentives
Slow to adjust to economic conditions
Government chooses what is good for society not for the
people
Economic growth


Little innovation
Must follow government plans
Advantages of Centrally Planned
Economy

Economic equality



Goods and services should be distributed fairly
People in government make more choices
Successes

Full employment
Do now
1.
2.
3.
What are the characteristics of a free
market economy?
What are the characteristics of a
Command economy?
How does Karl Marx and Adam Smith
differ when it comes to economic
philosophies?
Mixed Economies

Mixed economy is a market based economy in which
the government has some involvement.

There some economic goals that can not be met by
either a command or a free market economy.
 Public education
 National defense
 Mass transit

What are Governments willing to give up?
Mixed Economies



Most Nations have mixed economy.
Depending on the nation government involvement
varies.
 Cuba, North Korea, Old Soviet Union (very high
gov’t involvement).
 Russia, China and Vietnam are in economic
transition. (Privatization)
United States, United Kingdom (little gov’t involvement)

Free enterprise, (consumers choose)