econ ch2 economic systems

ChapterChapter

EconomicEconomic

SystemsSystems2

Chapter ObjectivesStudents will learn:

1. The basic questions that any economic system must answer.

2. The basic varieties of economic systems.

3. How the 3 basic types of economic systems differ in their answers to the fundamental economic questions.

4. How the theoretical models of economic systems actually work in the real world.

Economic Systems

What is an economic system?

• System=order, structure, rules

• Economic=factors of production, resources

• Economic system=the way a country decides to use its resources

The Basic Economic Questions

1. What to produce– ALLOCATION OF

RESOURCES

2. How to produce– PRODUCTION &

EFFICIENCY

3. For whom to produce– WHO GETS WHAT? WHY?

Kinds of Economic Systems

1. Traditional

2. Command

3. Market

Traditional Economies

– Based on previous generations

– Stable– No incentives– No changes / no freedom– Very rare, doesn’t exist in

very many places

Command Economies

– Central authority makes decisions

– Government owns or controls factors of production

– No freedom– Controls distribution– National planners– Quick in emergencies– Examples?

Market Economies

– Free market/laissez-faire– Invisible hand/Adam Smith– Self-interest– Workers exchange labor for wages– Use income to buy goods &

services– Decisions based on prices– Efficient approach– Poor are at a disadvantage

Comparing Command & Market

Economic Systems in the

Real World

All economies

are mixed.

Changing Economies

More and more, countries are turning to capitalism and free markets

Transitional economies =– Command Market – Creates new markets, new ideas, and new

relationships– Examples?