Download Economic Systems

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
All societies have an economic system or a way of providing
for the wants and needs of their people.
An Economic Systems function is to produce and distribute
goods and services to consumers
An economy must answer 3
economic questions: What
should be produced? How
should it be produced? Who
will consume these goods
and service?

How a society answers these questions
depends on how much it values
economic goals of efficiency, freedom,
security, equity and growth.
What goods or services
should be produced?
-How much resources should
be devoted to national
defense? Education? Health
care?
1)
2) How should it be produced?
 -Should we have coal, oil, or nuclear
power? Should teacher have 20 kids or
50 kids in a room?
Who
consumes the
goods and
services?
- How will
society
distribute
income? Who
will buy the
household
products?
Who will
clean your
house?
3)
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Traditional economy: Relies on habit or
custom. Little innovation. Similar to
family system. Boys follow dad’s
footsteps, girls follow mom. Examples:
Hunting, farming. Low standard of living.
Market economy: Decisions made by
individuals based on exchange, trade.
(aka free markets, capitalism)
Centrally planned economy:
(aka command economy)
Government decides
everything. Example:
communism.

Mixed economy: Market-based
economy where government plays a
limited role. This is the United States.
Allocation of scarce resources, and
nearly all other economic activity, stems
from ritual, habit or custom.
 Individuals are not free to make own
decisions.
 Advantage: everyone knows the role
they play
 Disadvantage: discourages new ideas

People and firms make decisions based
on what best suits their interest. Ex. USA,
Canada and Great Britain
 Advantage: overtime it can make
changes in demand. Ex. Fast food to
health food
 Disadvantage: does not always provide
for basic needs of people. Ex. Homeless
people

A central authority (government) makes
most of the decisions.
 People have little if any influence over
production. Ex. North Korea, Cuba and
former Soviet Union.
 Advantage: can change direction
drastically in a short time. Ex. farming to
industrial
 Disadvantage: Not designed to meet the
wants of consumers (Everyone gets only 1 In
and Out burger.

Market: An arrangement that allows
buyers and sellers to exchange things.
 Markets exist because it allows people to
buy what they need to consume and sell
goods and services they produce.

Specialization: The concentration of the
productive efforts of individuals and firms
on a limited number of activities.
 Example: a mechanic specialized in
fixing Japanese cars or and assembly
line

Household: A person or group of people
living in the same residence.
 Firm: Business; an organization that uses
resources to produce a product
 Factor market: Market in which firms
purchase the factors of production
(land, labor, capital) from households
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Profit: The financial gain made
in a transaction
Product market: The market in
which households purchase
the goods and services that
firms produce.
Free market is an economic system
where people do what’s best for them
for personal gain.
 Consumers have an interest in looking for
lower prices
 Producers engage in a competition for
consumer’s money.

Wrote The Wealth of
Nations in 1776
 Known as the Father of
Economics
 Said people are selfish,
but that’s ok because
it works
 Called the relationship
between self interest
and competition the
invisible hand

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Said government
should stay out of the
economy (laissez faire
means ‘hands off’)
Government should
only be involved with
education, health
care and
transportation.
Self-interest is the motivating force behind
the free-market. People produce goods
and services for their own personal gain.
 Competition is the struggle among
producers for the dollars of consumers. This
helps control firm’s selfishness.
 Competition act’s as a regulating force in
the marketplace. Without competition a
business can monopolize a product or
service

rewards efficient producers and buyers
 results in:
 goods society wants
 quantity society wants
 prices society is willing and able to pay
 normal profits
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The Free Market Economy, however,
does need some Government
intervention to provide for things that the
market place does not address.
 Example: national defense, roads and
highways, education, and health care
 Incentive: The hope of reward or the fear
of punishment that encourages people
to act in a certain way.
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Why is the free market system good?
 1) It works. Producers make what
consumers want, when they want it.
Prices are pretty good.
 2) Freedom. Work where you want, buy
what you want, make what you want.
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3) Growth is encouraged because
innovation is encouraged.
 4) A wide variety of things get made
because consumers decide what gets
made.
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Consumer sovereignty is the power of
consumers to decide what gets
produced
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Scarcity exists
Societies must find a
way to allocate
scarce goods and
services
In any allocative
mechanism, some
people will be told
“No.”
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The market system is
efficient, but…
Neither markets nor
other economic
systems are “fair.”
In command economies, the government
controls the factors of production and
answers the 3 economic questions of what,
how and for whom to produce for all of
society.
 Idea is that the government makes all the
choices that will benefit or is best for the
whole society, not just a few individuals
 Command economies often associated
with socialism, communism and
authoritarianism.

Socialism is the belief that democratic
means should be used to distribute
wealth evenly through a society
 Communism is the belief that
government leaders should distribute
wealth evenly through a society.
 Authoritarianism (Fascism)- requiring strict
obedience to an authority, such as a
dictator. No individual freedoms.

Problems
 Poor Quality of Goods= workers don’t care, as long as
they produce what they are told to produce
 Shortages of Goods and Services= need products are not
made
 Diminishing Production = workers don’t care, they don’t
get raises for producing more; no incentives
 Performance always falls short of ideals that the system is
built
 Can’t meet the needs of consumers needs and wants:
Government decides what is produced, not consumers
 The system does not reward innovation, is not flexible, and
sacrifices individual freedoms for the “good” of whole
society