ECONOMIC SYSTEMS and AMERICAN FREE
ENTERPRISE
Economic Systems • Defn
• The ways a country answers the 3 basic economic questions determines which economic system they have
• 4 Economic Systems:Free Market (aka Free Enterprise,
Capitalism, and Laissez Faire)Command (centrally planned)Traditional Mixed
Economic Goals:• Shared by most societies
• Importance based on the needs and values of each society
1. Economic efficiency- making the most of resources
2. Economic freedom- Freedom from govt intervention in the production and distribution of goods and services
3. Economic security and predictability- Assurance that g & s will be available.
4. Economic equity- Fair distribution of wealth
5. Economic growth and innovation- GDP
Innovation leads to economic growth, and growth leads to a higher standard of living.
6. Economic stability- no drastic fluctuations in prices; no ups and downs
Traditional Economies:• People rely on traditions or customs
to make the what, how, and who choices
• Less common and usually found in rural areas/ less modern
• Based on agricultural industries
• Meant to meet local needs
• Kids tend to have the same jobs as their parents by gender
Command (Centrally Planned) Economies:• Govt owns factors of production
• Govt answers the 3 economic questions
• There is NO self-interest or competition
• Socialism- uses democratic means to distribute wealth evenly; tries to couple political equality with economic equality
• Communism- ALL power in hands of govt; usually preceded by violent revolution. It doesn’t allow democracy- usually authoritarian
ex- Soviet Union 1920-1991; Romania til 1989
Advantages of Centrally Planned Economies:
• Can jump-start select industries
• Guarantee jobs and wages
Disadvantages:
• Poor quality
• Serious shortages of non-priority goods and services
• Diminishing production
• Can’t meet consumers wants/ needs
• Lacks incentives/ rewards to workers; discourages change & innovation
• Lacks flexibility
• Decisions become overly complicated
• Sacrifices individual freedom for social goals
** Most command economies have moved toward mixed economies b/c they can’t meet consumer’s needs, were inefficient, and public unrest due to lack of freedom
Free Market:• Market- defn ex- mall, internet, catalogue, etc.
• Specialize- defn markets allow for easy exchanges of goods/services we specialize in for those that others specialize in
• Free Market- defn Ask yourself: who owns the factors of production??
• What motivates us? If this is true, how can we promote the best interests of society as well?
• Adam Smith- father of economics; Wealth of Nations He said we are guided by the invisible hand (defn) and competition regulates us.
4 Pillars of Free Enterprise:1. Private property- we
decide how to use/care for things we own; this gives us incentive to use our resources efficiently
2. Price system- prices guide us by giving us information about products/ resources; they also provide us with strong incentives
3. Market competition- scarcity makes firms and consumers compete for g & s
-firms compete for profits (defn) P=TR-TC
4. Entrepreneurship- encouraged by Free Mkt by providing incentives; this encourages growth
Circular Flow of G/S & Money:• Definitions: circular flow, households,
firms
• 4 components:
–Households
–Markets for Resources (Factor Mkt)
–Production of Goods and Services
–Goods and Services Market (Product Mkt)
Mixed Economies:• No economy is purely command or free-
some are more one than the other
• One advantage is individuals make their own economic choices but the govt provides goods and services people wouldn’t have otherwise
China is mixed on the side of command- they are in “transition”
Let’s compare economic systems (see tran)
American Free Enterprise: Goals of US economy-
* full employment- jobs for all who are able
* economic growth- higher standard of living (defn)
Gross Domestic Product (total value of all G&S produced in an economy) is one tool we use to measure economic growth/ business cycle (defn)
* stability
* freedom
* security
* equality
* efficiency
Free market needs govt intervention to provide what the mkt can’t/ ex??
Free mkt encourages economic growth.
Government’s Role in Free Mkt:• Do they have one? If so, what and to what
extent? Is public interest their job?
• Do they ever go beyond the boundaries?
• Is it fair to say, “majority rule but minority rights?”
• Is it right?
• To what extent are we a mixed economy?
• Should the govt intervene in the economy in an effort to make it better? Does this sacrifice any of our rights?
• Providing Public Goods:
–Public good (defn) a shared good or service for which it would be inefficient or impractical 1) to make consumers pay individually and 2) to exclude nonpayers
ex: roads, bridges, dams, space program
What would happen if you had to pay to have a road built in front of your house?
–private good (defn) goods that provide benefit only to the purchaser; these goods are produced b/c of the incentive the producer receives for it
–Free rider problem: people benefit from a G/ S & would not choose to pay for it
ex: Would you be willing to pay equally for your share of the costs associated with running the military?
Providing a Safety Net:• Why should we provide a safety net for those
who can’t seem to support themselves?
• As a society, we recognize some responsibilities to the very young, very old, sick, poor, and the disabled. They deserve to have at least a minimal standard of living.
• Govt attempts to do this by redistributing income through taxation and welfare programs such as cash transfers (social security, worker’s comp, unemployment), in-kind benefits (food stamps, WIC, legal aid, housing), medical benefits, and education benefits
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