ECONOMIC SYSTEMS. What is an Economic System? Economic system – how a country decides to create,...
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Transcript of ECONOMIC SYSTEMS. What is an Economic System? Economic system – how a country decides to create,...
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ECONOMIC SYSTEMS
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What is an Economic System?
• Economic system – how a country decides to create, buy and sell products & resources
• 3 Basic Questions to Figuring Your System–What will we produce with our resources?– How will we produce the products chosen?–Who are we producing these goods for?
• Extremely difficult to answer these questions
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Breakdown of Questions
• What to Produce?– Must ask this due to scarcity of resources
• Don’t have enough to produce everything• Do you choose what people need or what is profitable?
• How to Produce It?– Large factories or mom and pop shops– Corporate farms or family farms
• Who Gets It? (Toughest of the Questions)– How do you decide who gets it?
• Base it on need? Base it on wealth? Base it on first in line? Base it on equality or fairness?
• How do then decide who is in need or what is fair?
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Economic Systems Based on Your Economic Goals
• Six possible economic goals– Can choose to achieve one or more, not
all 6
• Economic Freedom – all people have full freedom of what to make and buy or sell without government interference– Usually a goal, but tough to achieve fully– People want protection from violators and
government expected to do this
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Other Economic Goals
• Economic Efficiency – economy strives to not waste ANY of its resources– Includes all natural and human resources– Has a goal of FULL EMPLOYMENT – no
waste
• Economic Equity – strives to give all in society an equal amount– Problems arise with what is equal?• Does everyone get a little? • Do the rich or the poor receive more?
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Other Economic Goals
• Economic Growth – strives to produce more and better goods– Usually a goal of all economic systems
• Economic Security – strives to support those in society who cannot provide themselves– Includes the too young or old, sick or dying, etc.
• Economic Stability – strives to keep the economy stable and running well– Keeps things predictable; having goods, water,
electricity, jobs and prices relatively consistent
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3 Basic Economic Systems
• Traditional Economy – oldest system– Based on the traditions and customs of a group of
people – hunter-gatherers, etc.– Often found in small clan societies
• Command Economy – decisions by a powerful ruler– Ancient civilizations are an example
• Egyptian pharaohs commanding what to grow and what to do with taxes, people, slaves, etc.
• Market Economy – decisions by individual consumers– Free Market Economy – no one tells anyone what to
make, all choices are made voluntarily• Strive to achieve economic freedom and efficiency
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The Flow of Goods and Money
• Markets work well due to circular flow– One person’s output is another’s input
• Flow goes between households and firms– Households include a person or group of
people– Firms are businesses
• Land, labor and capital are traded for wages
• Goods are traded to people for money
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What is an Economic System?
• Economic system – how a country decides to create, buy and sell products & resources
![Page 10: ECONOMIC SYSTEMS. What is an Economic System? Economic system – how a country decides to create, buy and sell products & resources 3 Basic Questions to.](https://reader035.fdocuments.us/reader035/viewer/2022062803/56649f455503460f94c66870/html5/thumbnails/10.jpg)
Two types of markets in model
• Product market – deals with the goods and services created by firms which are bought by the households
• Factor market – deals with factors given up by households and paid for with wages or purchases of land– Considered factor payments
• All these things work without intervention because people are worried about their own interest– People work for money to buy goods, firms build
products to sell them for profit
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Capitalism, Socialism, and Communism
• All born out of the Industrial Revolution– People become rich off new machines; poor workers
working in terrible conditions• Socialism - created to help the workers
– Idea that society owns all property – equality– Spreads through USSR and other countries
• Communism – society owns all property and wealth– Struggles due to use of a command economy– Government tried to control over 24 million products– Unable to do so like markets can and resources
wasted– No incentive to work harder so products are poor
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Governments Role in Economy
• Govt needed to set up institutions for markets– Legal system, currency, labor laws, etc.– Also limits sale of dangerous products
• Certain foods, drugs, cosmetics, etc.
• Govt also provides services that would not usually be available due to price– Public works – sewers, roads, highways, etc.– Each country different in what they provide to
society
• Role of government determines level of freedom
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Governments Role in the Flow of Goods and Money
• Government adds a new level to the flow– Employs largest number of workers in US– Also purchases largest number of goods
• Government collects taxes to purchase goods– Also pays wages to employees for services
• Also goes to pay for services like Soc. Sec.– These referred to as transfer payments
• Transfers money from one household to another
• Govt involvement places countries on the Mixed Economy Continuum– Explains the level of economic freedom of each
country
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What is an Economic System?
• Economic system – how a country decides to create, buy and sell products & resources
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What is an Economic System?
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The US Economic System• US has a free enterprise system
– Individuals control all factors of production– Described as laissez-faire – without government
• Offers competition and equal opportunity– Also have contracts – agreements between
buyer/seller • Property Rights – rights to own property
– Includes intellectual ideas, copyrights, patents, etc. • Profit Motive – our incentive to work harder or
create new products and ideas or services• Limited government involvement
– Usually limited to protecting or supporting the people• Property rights/ contracts, general welfare, preserve
competition, protect buyers/sellers, and stabilization