Chapter 2

Economic Systems

In your group of four (4) put the following words into alphabetical order as quickly and accurately

as possible. Use the contributions of all group

members as much as possible, but remember that the goal is to

finish the task in a timely manner. Raise your hand when

your group is done and stay quiet.

Group Roles#1 Anything you want to

#2 Anything you want , but no talking

# 3 Anything you want, but keep hands behind back

#4 Anything you want, but keep eyes closed

#5 Anything you want, but no talking, keep eyes #5 Anything you want, but no talking, keep eyes closed, and hands behind backclosed, and hands behind back

The Three Economic Questions

• Every society must answer three questions:– What goods and services should be

produced? – How should these goods and services be

produced? – Who consumes these goods and services?

Economy or Economic System

– An organized way of providing for the wants and needs of a society.

• Three Types of Pure Economic Systems1.Traditional

2. Command

3. Market

Traditional Economy• Based on custom and

tradition• answers to the 3

economic questions are found in the past

• Children often carry on roles of their parents as hunters or farmers

• Drawbacks: new ideas are discouraged and often punished

• Ex. Canadian Inuits

Command Economy• Government officials answer

economic questions. Central planners decide who will receive products and what will be produced.

Strengths: can easily change economic direction

Weaknesses: they do not always meet the needs of individuals, there is little incentive for individuals to work hard, large bureaucracies often are slow making decisions, are not flexible enough to deal with day to day problems.

• Ex. North Korea, Cuba, and the People’s Republic of China.

Market Economy• Individuals answer

the 3 economic questions

• Government has no say. Factors of production (resources) are owned by individuals

• People can buy, sell, or produce anything they want

Economic Goals

Making the most of resourcesEconomic efficiency

Freedom from government intervention in the production and distribution of goods and services

Economic freedom

Assurance that goods and services will be available, payments will be made on time, and a safety net will protect individuals in times of economic disaster

Economic security and predictability

Fair distribution of wealthEconomic equity

Innovation leads to economic growth, and economic growth leads to a higher standard of living.

Economic growth and innovation

Societies pursue additional goals, such as environmental protection.

Other goals

Economic Goals• Societies answer the three economic questions

based on their values.

Mixed economies- combine elements of traditional, market, & command economic models.

• Authoritarian socialism or communism- closest to command– the government owns or directs

nearly all factors of production (Cuba)

• Capitalism- economies closest to market

• Democratic Socialism- between authoritarian socialism and capitalism. – Gov’t owns some factors of prod.

usually key industries like utilities, telephone, etc. Leaders are elected by the people. (Sweden, Poland, France.)

CapitalismStrengths: • Produces more

w/available resources than others

• Provide equality of opportunity b/c of strict property protection rights

Drawbacks: does not distribute wealth equally. Despite basic fairness there will always be discrimination.

Features:Private individuals own

resources & choose how they are used.

– Gov’t has limited economic power, acts only to prevent fraud or others from using force, and to protect safety.

– Exchanges between producers and consumers are voluntary.

– (Canada, Mexico, Japan, Taiwan)

Adam Smith- Philosopher & economist who explained the process of market regulation.

• when the government is not involved in the economy that the market is purely driven by self-interest.

• self-interest acts as an “invisible hand” that leads people to do what is best for society

• Incentives- can be positive or negative- encourage people to behave in a particular way

• Profit Motive- the incentive for a producer to improve or innovate due to a possible monetary gain

Makes people act in their own self interest

Continuum of Mixed Economies

Centrally planned Free market

Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick

Iran

North Korea

Cuba

China

Russia Greece Peru United States

South Africa France United Kingdom

Botswana Canada Singapore

Hong Kong

Comparing Mixed Economies• An economic system that permits the conduct of business with minimal government intervention

is called free enterprise. The degree of

government involvement in the economy varies among nations.