Download Economic Systems

Economic Systems
What is an economic system?
• Remember SCARCITY – b/c scarcity exist, different
societies must come up with methods for
distributing their resources
• Economic System = Method used by a society for
distributing goods/services
• Three Types of Systems –
• 1. Command 2. Market 3. Mixed
• How do we determine which type of economic
system a society has?
• By looking at two concepts
• 1. How they answer the three economic
questions
• 2. Where they value certain economic goals
Three Economic Questions
• Each society faces three key economic questions
– it is how the society answers them, that will
determine which “system” they use
• 1. What goods and services should be
produced? (given their current resources)
• 2. How should these goods/services be
produced?
• 3. Who will consume (buy) these
goods/services?
• Again, determining how a society answers these
questions can help tell us what type of economic
system they have.
Economic Goals
• In addition to how a society answers the THREE
questions, we also look at their economic GOALS
• There are six main goals in economics –
determining where a society places these goals on
a scale of importance can help us determine what
type of system the have
• 1. Economic Freedom
2. Economic Efficiency
3. Economic Stability
4. Economic Equity
5. Economic Growth
6. Economic Security
Economic Freedom
• Many economic decisions are left up to the
society to make – not the government
• Limited government influence, but still
present
• Freedom of choices – like what you can buy,
where you can work, what you can sell etc
Economic Efficiency
• Maximizing resources to their fullest extent
• Doesn’t waste resources on things consumers
will not use.
• Example: Do not try to make air conditioning
units to sell in Alaska during December – you
are wasting time and resources.
Economic Stability
•
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Maintaining a stable market and workforce
Prices are stable, jobs are stable, etc
Maintaining a good Standard of Living
Standard of Living = level of economic
prosperity (how well you enjoy life)
• Strive for high levels
• Ex: minimum wage, price maximums, slow
inflation
Economic Equity
• Focuses on FAIR distribution of resources –
same for all
• Everyone should get equal amounts – no elite
or wealthy and no poor or bottom
• Prices are even
Economic Growth
• Encourage innovation, technological advances,
new ideas, etc.
• Believes society cannot be successful without
moving forward
• Invest in factors of production
Economic Security
• Assuring that goods/services are available
• Ensure that payments are made and providing
safety nets for hard times
• Ex: Programs in place to prevent depressions
Command Economy
• In a command economy ( also called centrally
planned economies)
• Government answers the three economic
questions
• Goals they prioritize tend to be equity, stability,
and security
• Goals they DO NOT prioritize - economic
freedoms
• Same prices, same goods/services, lack of
competition, not a lot of encouragement for
innovation b/c everyone is seen as equals
• Pros and cons
(free) MARKET ECONOMY
• Individuals aka Consumers and Producers
answer the three economic questions
• NO government regulations or involvement
• Involves VOLUNTARY exchange or trade
• Adam’s Smith Invisible Hand – leave the economy
alone, and it will work on its own. The
relationship between buyers and sellers is natural
• Also called FREE MARKET, PURE MARKET or
CAPITALISM
• Consumers control many decisions – if they do
not like a certain product/service and do not pay
for them, then the producer will stop producing
the good/service
Mixed Economy
• Both Government and Individuals answer the
three economic questions
• Government should balance the risks of
Capitalism while still allowing for individuals
to make decisions
• U.S. has “Market” based Mixed economy in
which gov’t plays a LIMITED role
• A combination of market and command