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Economics
Unit 2
Economic Systems
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Section 1: Types of Economics
Systems
• Nations, like you and I, must make choices
about how to use their natural, human,
capital, & entrepreneurial resources
efficiently.
• Nations, also must answer in some way
the three basic economic questions of
what, how, and for whom to produce.
Economic Systems
• Nations respond to the 3 economic
questions and the 4 factors of production
to a large degree based on their economic
systems
• The four types of economic systems are:
– Traditional
– Command
– Market
– Mixed
Mixed?
• Actually all economies today are some
form of mixed economy
• No pure traditional, command, or market
economies exist
• We simply classify them as the one they
are closest to
Traditional Economies
• Traditional economies answer the
economic questions as they have done in
the past
• Activities are based on rituals, habits,
laws, and religious beliefs developed by
their ancestors
• Traditional Economies are found in less
developed parts of he world
Traditions are passed down
• Father to son, mother to daughter
• You carry on the family traditions
Command Economies
• A Command economy relies on
government officials to answer the three
basic economic questions
• Officials or central planners have the
power to decide what products will be
made and how they will be produced
• They also decide who receives the
products once they are made
Individual Rights In Command
Economies
• Individuals have little or no say in making
economic choices
• The government maintains complete
control over the factors of production
• No “pure” command economies exist
Market Economies
• In a pure market economy, individuals
answer the three economic questions
• The government has no say
• Individuals are free to exchange goods
and services in the market
• No pure market economies exist today,
but the countries of the United States,
Germany, & Japan are very close
Compare Types of Economic
Systems
P 26
Early thoughts on Market
Economies
• Adam Smith, a Scottish economist and
philosopher wrote “An Inquiry Into the
Nature and Causes of the Wealth of
Nations” in 1776
• He believed market economies were
driven purely by self interests
• Self-interest is the impulse that
encourages people to fulfill their own
needs and wants
Self-Interests
• Some believed that self-interests would
lead to individuals ignoring the needs of
others
• Smith argued that self-interest benefits all
of society by helping the economy grow
• He said that self-interest acts as an
invisible hand that leads people to do what
is best for society even if they don’t know
that’s what they are doing
Limiting the Invisible Hand
• Smith believed that government
involvement in the economy conflicts with
self-interest and limits the “invisible hand”
to regulate the market
• Smith believed in a limited role for
government
• --Protect us from outside enemies (military)
• --Protect us from those around us who want to
harm us (police)
• --Settle disputes among us (courts)
Incentives
• An incentive is something that encourages
you to behave in a particular way
• An incentive might be in the form of a
bonus for increasing production or sales
• A negative incentive can also be used
such as a penalty for not making
production or sales quotas
Mixed Economies
• A mixed economy combines elements of
traditional, market, and command
economic models
• They are usually described by defining the
economy they are most close to
• Authoritarian socialism
• Capitalism
• Democratic socialism
Authoritarian Socialism
• These economies are also referred to as
communism
• The government owns or controls nearly
all of the factors of production
• These governments engage in long-term
planning and limits decision making power
by individuals
• North Korea, Russia & Cuba are examples
of this system
Capitalism
• In this economy, individuals own the
factors of production and answer the basic
economic questions
• Individuals can decide what to produce,
what career you pursue based on your
own interests and skills
• The United States, Canada, Mexico,
Japan, and Taiwan are capitalistic
Governments Role in Capitalism
• These governments have taxing and
spending authority
• They provide services to society such as
education, social welfare programs,
national defense, health & safety
standards in the workplace
• Private ownership and free choice are
basic to capitalism
Democratic Socialism
• The government owns some of the factors of production
• Key industries: electrical utilities, telephones,
• These are deemed to be in the “national concern”
• Individuals can influence the government ownership by electing government officials
• Sweden, Poland, & France are examples
Sec. 2: What is Free Enterprise?
• Because of the great number of economic
freedoms in the US we sometimes call our
system a free enterprise system
• Free Enterprise is a system where
business can be conducted freely with little
government intervention
• Encourages investment
• Prices tend to respond to competition
5 Features of US Free Enterprise
• Individuals have the right to …..
• 1. Own private property and enter into
contracts
• 2. Make individual choices
• 3. Engage in economic competition
• 4. Make decisions based on self-interests
• 5. Participate in the economy with limited
government involvement & regulation
Private Property & Contracts
• Goods owned by individuals and businesses
rather than the government are considered to be
private property
• Individuals & businesses can…..
– Use or dispose of property
– Buy as much as they can afford
– Sell as much as they can
– Enter into agreements (contracts), oral or written, to
buy and sell
• Contracts are legally enforceable
Individual Choice
• Laborers, producers, and consumers in the United States enjoy freedom of choice
– Pursue job opportunities of our choice
– Make whatever (legal) goods and services they want
– Buy whatever (legal) goods and services that meet our needs
Economic Rivalry
• When two or more business people make the same production choices, it leads to competition
• Competition is the economic rivalry that exists among business selling the same or similar products
• Competition encourages producers to improve existing products and to develop new ones to attract customers
Voluntary Exchange
• Producers and consumers are free to
purchase and sell when the terms of the
trade are acceptable to both parties
• The transaction is called a voluntary
exchange
• Both parties gain by the exchange (they
get what they want)
Limited Government Involvement
• Individuals, not the government, make most decisions in a market economy
• The government does have an important role….• Establishes health and safety laws
• Monitors banking practices
• Prohibits discrimination in the work place
• Provides public services like national defense, public education
• Encourages economic stability by encouraging economic growth, low unemployment, & stable prices
• The government has taxing authority to carry out it’s role
Economic Actors in Free Enterprise
• Producers
• Consumers
• Government
Producers
• Producers provide goods and services in
the market
• They combine human, natural, & capital
resources to create a product or perform a
service
• They can satisfy the needs and wants of
consumers
• Benefit others by providing jobs
Consumers
• Influence production by purchasing goods
and services
• We communicate with producers by
saying “produce more” when we buy, or
“stop producing this” when we don’t buy
• Consumers verify to producers that they
have or have not made the right decisions
about what, how, and for whom they
produce
Government
• Government plays a limited but important
role in the US free enterprise system
• It oversees and regulates the decisions of
the other economic actors (producers &
consumers) and regulates the effects of
these decisions on the economy as a
whole
Everyone is Connected
• Producers, consumers & government play
different, but connected roles in a market
system
• Resources, products, & money payments
are exchanged among economic actors in
our economy
Circular Flow Model
Shows the exchange of
resources, products, &
money payments in the
US economy (how it
works)
The green
arrows
represent the
product market
where
businesses
make goods to
sell to both
households
and
government
Gold arrows represent
the resource market.
Individuals provide
labor & resources in
exchange for income
and then pay taxes to
the government
This illustrates that
consumers, producers & the
government are dependent on
each otherp. 34
Section 3: The US Economy at
Work
• The United States has six major economic
goals
– Freedom
– Efficiency
– Equity
– Security
– Stability
– Growth
Economic Freedom
• Consumers should be able to decide how to
spend their incomes on goods and services
• Workers should be free to choose an
occupation, change jobs, or join a union
• Savers & investors are free to choose where,
when, & how to save or invest their money
• Business people are free to open new
businesses, change from one business to
another & expand or close their businesses
Economic Stability
• Enjoy full employment (the lowest possible
level of unemployment)
• The government tracks unemployment
rates which fluctuates as businesses
open/close and workers quit/get new
jobs/get laid off
• Price stability is when the overall price
level of goods and services in the
economy are relatively constant
Economic Growth
• Economic growth refers to efforts to
increase the amount of goods and
services produced by each worker in the
society
• Lower production from each worker means
that fewer goods and services are
available for each person to consume
Standard of Living
• Standard of Living refers to peoples
economic well-being
• Economists measure a nation’s standard
of living by how much an average person
in that country is able to consume in a
given period (one year)
• Standard of living improves when
production from each worker increases
faster than the total population
Economic Goals and Trade-Offs
• Goals, like wants must be evaluated to
decide which is more important at a
particular time, priorities change
• Scarcity forces individuals, businesses, &
governments to make choices among
various needs and wants
Economic Goals and Trade-Offs
• Sometimes priorities are not the same
from group to group
• Sometimes solutions for one group causes
problems for others
References
• Economics: Texas Edition: 2016. McGraw Hill Education
• Holt Economics; Texas Edition: 2003, Holt, Rinehart and
Winston