Chapter 2

Economic Systems

Answering 3 Economic QuestionsSection 1

Bell

Rin

ger

In your own words define the following terms and give an example of each.

Producer

Consumer

Product

Market

Learn

ing O

bje

ctiv

es

Identify the three economic questions

Analyze the societal values that determine how a country answers the three economic questions

Explain the characteristics of traditional, command, and market economies and describe the societal values that influence them.

Economic System

The method used by a society to produce and distribute goods and services

What

are

the 3

Q

uest

ions?

1. What should be produced? National defense?/

education?/public health?/welfare?/consumer goods?

2. How should products be produced?

Solar power? / nuclear power? / oil? / family farms? / corporate farms?

3. Who will consume products? Who gets what? BMW v. Ford

Patriotism

Love of one’s country; passion that inspires a person to serve his or her country

Safety Net

Government programs that protect people experiencing unfavorable economic conditions

Eco

nom

ic G

oals

Efficiency Making the most of limited

resources

Freedom Patriotism

Security & Predictability Safety net

Natural disasters, welfare programs, social security,

Goods available when needed

Eco

nom

ic G

oals

Conti

nued

Equity Fair distribution of wealth

=$4=work

Innovation & Growth Innovation → Growth → higher

standard of living

Innovation = inventing new ideas

Other Goals Example: Environmental Protection

Standard of Living

Level of economic prosperity

Types

of

Eco

nom

ies

Traditional

Market

Command

Mixed

Traditional

MarketCommand

Mixed

Create a Venn Diagram comparing different systems

Traditional Economy

Economic system that relies on habit, custom, or ritual to decide questions of production and consumption of goods and services

Tradit

ional Eco

nom

y

Based on

Customs

Habits

Rituals

Sons follow in fathers footsteps & daughters follow in mothers footsteps

Very little innovation/growth/change

Examples: Amish, American Indians, Eskimos

Market Economy

Economic system in which decisions on production and consumption of goods and services are based on voluntary exchange in markets

Mark

et

Eco

nom

y

Focused on the individual

Uses trading

Lots of innovation/growth/change

Example: Hong Kong, Singapore

Command Economy

Economic system in which the central government makes all decisions on the production and consumption of goods and services

Com

mand E

conom

y

Government controls everything & makes all decisions for everyone

Very little innovation/growth/change

Examples: Soviet Union, North Korea

Mixed Economy

Market-based economic system with limited government involvement

Mix

ed E

conom

y

Best of All Economies!! Government has limited role

Varies from economy to economy

Focuses on individual

Examples: United Kingdom, United States, Canada

Free MarketSection 2

Bell

Rin

ger

Jan

uary

12

Name and describe two types of economies discussed yesterday.

(without your notes if possible)

Learn

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Explain why markets exist

Analyze a circular flow model of a free market economy.

Understand the self-regulating nature of the marketplace.

Identify the advantages of a free market

Market:

An arrangement that allows buyers and sellers to exchange things

Specialization:

Concentration of the productive efforts of individuals and firms on a limited number of activities

Why d

o w

e n

eed M

AR

KETS

?

No one makes everything they need/want

Specialization

Efficiency of resources

Pla

yers

in F

ree M

ark

et

Individuals/

Households

Own F of P

Purchases products & services

Businesses/

Firms

Purchase F of P

Use resources to produce products & services

Page 30 in your book!

Adam Smith - 1776 Scottish philosopher/entrepreneur

Wrote: The Wealth of Nations

Invis

ible

Hand

“An economy is made up of countless individual transactions. In each transaction, the buyer & seller consider only their self interest or personal gain.”

Self-interest One’s own personal gain

Motivating force of Free Market

Competition Struggle among producers for

consumers’ business Regulating force of Free Market

Self-interest + Competition =

Invisible Hand

What keeps prices from skyrocketing?

What causes competition?

How can incentives be positive or negative?

Free M

ark

et

Pro

s &

Cons

Free Market Advantages: Economic Efficiency

Economic Growth

Economic Freedom

Endless Variety of Goods & Services

Free Market Disadvantages: Cannot address public needs/goods

Military / Roads / Libraries / Parks

Economic Equity

Bell

Rin

ger

Jan

uary

1

3th

What if you didn’t have a choice in your job profession…you couldn’t decide what you wanted to do after high school – the government decided for you.

Would you like that? Why or why not? What would be some advantages and/or disadvantages?

Please write complete sentences in a short paragraph.

Bell

Rin

ger

Jan

uary

1

7th

Create a Web diagram centered around the word

“Dictator”

Command Economy Centrally Planned Economy (CPE)

Section 3

Learn

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Describe how a centrally planned economy is organized

Analyze the centrally planned economy of the former Soviet Union

Identify the problems of a centrally planned economy

Command Economy:

System in which the central government makes all decisions

CPE S

truct

ure

Central Government Answers Economic Questions: What to

produce, how to produce, & who gets what

Everyone answers to the central govt.

People have no freedoms

Businesses are created by govt. only to provide what is needed

CPE A

tmosp

here

Govt controls all factors of production

People are told where and when to work

No person or business owns land

All physical capital is provided by the govt in rations.

Factories are told how much product to produce

There is no push for efficiency or profit

Soci

alis

m &

Com

mu

nis

m What is socialism?

A philosophy based on beliefs that democratic means should be used to evenly distribute wealth throughout society

What is communism? A political system in which the economy

& all economic and political power rests in the hands of the central government

Are these the same? How are the different?

- Democracy

- Authoritarian

CPE P

roble

ms

Discourages innovation

Poor quality of goods & services

Shortages of goods & services

Diminishing production

Ideals are better than the reality

Mixed Economies

Section 4

Why M

ixed E

conom

y?

Why do we need mixed economies? No economic system has all the

answers!

Government intervention has become a greater need in order to provide certain services

National defense; roads/highways; libraries

Govern

ment’

s R

ole Government creates laws to

protect property rights, enforce contracts and patent laws

Can you think of other reason to have government?

Cir

cula

r Fl

ow

– F

ree M

ark

et

Individuals/

Households

Own F of P

Buy goods & services

Businesses/

Firms

Buy F of P

Produce goods & services

Review

Cir

cula

r Fl

ow

- M

ixed

Individuals/

Households

Own F of P

Buy goods & services

Businesses/

Firms Buy F of P

Produce goods & services

Government

Buy F of P

Buy goods & services

Provide goods & services through taxes on both Households & Firms

So how does all this fit together?

− Traditional - Command

− Free Market - Mixed

How do these systems differ?

How are they similar?

Which goals do these economies achieve?

Which Economies Meet Which Economic Goals?

Economic Goal

Market Command Mixed

Efficiency

Freedom

Security

Predictability

Equity

Innovation

Growth

Others