Economic SystemsEconomic SystemsEconomic Fundamentals UnitEconomic Fundamentals Unit

Chapter 3Chapter 3

Economic SystemsEconomic Systems

Three Basic Three Basic QuestionsQuestions

• What to produce?What to produce?

• How to produce?How to produce?

• For whom?For whom?

Answers depend on goals and economic system

Goal: Economic Goal: Economic FreedomFreedom

• Individuals & Individuals & businesses businesses determine what, determine what, how and for how and for whom to producewhom to produce

Goal: SecurityGoal: Security

• government government provides shelter, provides shelter, food and other food and other basic necessities basic necessities for people who for people who need itneed it

Goal: EfficiencyGoal: Efficiency

• Resources Resources allocated so allocated so largest number of largest number of people get what people get what they want; very they want; very little waste of little waste of resources.resources.

Goal: EquityGoal: Equity

• Everyone gets Everyone gets their fair share of their fair share of goods and goods and servicesservices

• Hard to achieve – Hard to achieve – Why?Why?

Goal: GrowthGoal: Growth

• Economy Economy produces more produces more and better goods and better goods and servicesand services

• Requirement: Requirement: innovation or innovation or new ideasnew ideas

Goal: StabilityGoal: Stability

• Goods you need are always available; Goods you need are always available; economic certaintyeconomic certainty

• Predictable prices; stable employment Predictable prices; stable employment

Economic Systems Economic Systems and Goalsand Goals

Traditional Traditional Economic SystemEconomic System

• Three basic Three basic questions answered questions answered using?using?

• Custom and Custom and traditiontradition

• GOAL: Security GOAL: Security and Stabilityand Stability

Command Economic Command Economic SystemSystem

• Three basic questions Three basic questions answered using?answered using?

• Single authority (ruler or Single authority (ruler or government agency or government agency or dictator)dictator)

• GOAL: Security and GOAL: Security and EquityEquity

Market Economic Market Economic SystemSystem

• Three basic Three basic questions answered questions answered using?using?

• Decisions of Decisions of producers and producers and consumersconsumers

• GOAL: Efficiency GOAL: Efficiency and Freedomand Freedom

Mixed Economic Mixed Economic SystemSystem

• Three basic questions Three basic questions answered using?answered using?

• Decisions of individuals Decisions of individuals and governmentand government

• GOAL: Freedom, GOAL: Freedom, Stability and Equity?Stability and Equity?

Circular Flow ModelCircular Flow Model

PurposePurpose

• Circular flow Circular flow models show models show how money, how money, goods and goods and services circulate services circulate in market in market economyeconomy

Circular Flow Model Circular Flow Model - Terms- Terms

• Product Market: goods/services sold by firms. Product Market: goods/services sold by firms. Firms sell, households buyFirms sell, households buy

• Factor Market: goods/services sold by Factor Market: goods/services sold by households. Households sell, firms buyhouseholds. Households sell, firms buy

• Factor payments: households give for $$Factor payments: households give for $$• Give labor for wagesGive labor for wages• Rent out land Rent out land • Loan $ for interest paymentsLoan $ for interest payments• Buy stock for dividendsBuy stock for dividends

Free Enterprise Free Enterprise Economic SystemEconomic System

CharacteristicsCharacteristics

Free Market (Laissez Faire) Free Market (Laissez Faire) economy economy

• Individuals own factors of productionIndividuals own factors of production

• Individuals answer 3 basic economic Individuals answer 3 basic economic questionsquestions

• No government involvement in economyNo government involvement in economy

Characteristics of Characteristics of U.S. Economic systemU.S. Economic system

Pg. 50 in bookPg. 50 in book

1.1.Economic Freedom – individuals act in own Economic Freedom – individuals act in own best interestbest interest

2.2.Competition – anyone can own a businessCompetition – anyone can own a business

3.3.Binding contracts- decide which contracts to Binding contracts- decide which contracts to enter in toenter in to

4.4.Property Rights – right to own and useProperty Rights – right to own and use

Characteristics Characteristics cont.cont.

5.5. Equal Opportunity: same legal rights to Equal Opportunity: same legal rights to seek education, to compete in marketplace seek education, to compete in marketplace etc.etc.

6.6. Profit Motive – incentives matter!Profit Motive – incentives matter!

7.7. Limited governmentLimited government• Protect competitionProtect competition• Protect property rightsProtect property rights• Promote general welfarePromote general welfare• Protect consumersProtect consumers