Economic

Systems

Three Basic ?s

• What goods should be produced?

• How should the goods be produced?

• Who will get the goods and how will they be distributed?

Answer to the questions is not as important

as WHO answers the questions.

Types of Economic Systems

Traditional - based on customs and beliefs passed down for generations• Examples: Aborigines & Inuit• http://australianscreen.com.au/titles/crocodile-dunde

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Command - government answers the three basic questions

Market - individuals make decisions

Economic Systems

• Central planning or centralization - command economy - government making the decisions

• No perfect economic system

• All economies are mixed economies

Socialism

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Communism

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Capitalism

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Socialism

• An economics professor at a local college made a statement that he had never failed a single student before, but had once failed an entire class.

• That class had insisted that socialism worked and that no one would be poor and no one would be rich, a great equalizer.

• The professor then said, "OK, we will have an experiment in this class on this plan".

Socialism

• All grades would be averaged and everyone would receive the same grade so no one would fail and no one would receive an A...

• After the first test, the grades were averaged and everyone got a B.

• The students who studied hard were upset and the students who studied little were happy.

Socialism

• As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.

• The second test average was a D!

• No one was happy.

Socialism

• When the 3rd test rolled around, the average was an F.

• The scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

Socialism

• All failed, to their great surprise, and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great but when government takes all the reward away, no one will try or want to succeed.

Mixed Economy

Command

Market

Government Individual

Characteristics of a Market Economy

• Limited role of Gov’t– Capitalism– Adam Smith– Laissez-faire

Market Economy cont.

• Freedom of Enterprise– Individuals own the factors of production– There is no guarantee of success– Gov’ts do place some restrictions

Market Economy cont.

• Freedom of Choice– People can buy what they want– Demand will determine what is produced– Gov’t sets safety standards– Gov’t regulates some industries

Market Economy cont.

• Profit Incentive– People produce goods to make a profit– The desire to make money is profit

incentive– There is also a risk of losing money

Market Economy cont.

• Private Property– Own by individuals instead of gov’t– Control of usage– Protected by the Constitution

• Eminent Domain

Market Economy cont.

• Competition– Different people can produce similar

products and services– Businesses need to use resources

efficiently to stay competitive– Competition does two things

• Lowers price• Improves quality

Goals of the U.S. Economy

• Economic Freedom - allow for as many choices as possible

• Economic Efficiency - using resources to the best of our ability (specialization, division of labor)

• Economic Equity (fairness) - EEOC

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Goals of the U.S. Economy

• Economic Security - protection against things beyond our control. (Social Security, Workman’s Compensation, Unemployment Compensation)

• Economic Stability - protection of our standard of living

• Economic Growth - increasing production of goods and services across the economy.

Unemployment claims rise; durable orders drop