Economic Systems

What is an economic system?• Remember SCARCITY – b/c scarcity exist, different

societies must come up with methods for distributing their resources

• Economic System = Method used by a society for distributing goods/services

• Three Types of Systems –• 1. Command 2. Market 3. Mixed • How do we determine which type of economic

system a society has? • By looking at two concepts• 1. How they answer the three economic questions• 2. Where they value certain economic goals

Three Economic Questions• Each society faces three key economic questions

– it is how the society answers them, that will determine which “system” they use

• 1. What goods and services should be produced? (given their current resources)

• 2. How should these goods/services be produced?

• 3. Who will consume (buy) these goods/services?• Again, determining how a society answers these

questions can help tell us what type of economic system they have.

Economic Goals• In addition to how a society answers the THREE

questions, we also look at their economic GOALS• There are six main goals in economics –

determining where a society places these goals on a scale of importance can help us determine what type of system the have

• 1. Economic Freedom 2. Economic Efficiency3. Economic Stability 4. Economic Equity 5. Economic Growth 6. Economic Security

Economic Freedom

• Many economic decisions are left up to the society to make – not the government

• Limited government influence, but still present

• Freedom of choices – like what you can buy, where you can work, what you can sell etc

Economic Efficiency

• Maximizing resources to their fullest extent• Doesn’t waste resources on things consumers

will not use.• Example: Do not try to make air conditioning

units to sell in Alaska during December – you are wasting time and resources.

Economic Stability

• Maintaining a stable market and workforce• Prices are stable, jobs are stable, etc• Maintaining a good Standard of Living• Standard of Living = level of economic

prosperity (how well you enjoy life)• Strive for high levels• Ex: minimum wage, price maximums, slow

inflation

Economic Equity

• Focuses on FAIR distribution of resources – same for all

• Everyone should get equal amounts – no elite or wealthy and no poor or bottom

• Prices are even

Economic Growth

• Encourage innovation, technological advances, new ideas, etc.

• Believes society cannot be successful without moving forward

• Invest in factors of production

Economic Security

• Assuring that goods/services are available• Ensure that payments are made and providing

safety nets for hard times• Ex: Programs in place to prevent depressions

Command Economy

• In a command economy ( also called centrally planned economies)

• Government answers the three economic questions

• Goals they prioritize tend to be equity, stability, and security

• Goals they DO NOT prioritize - economic freedoms• Same prices, same goods/services, lack of

competition, not a lot of encouragement for innovation b/c everyone is seen as equals

• Pros and cons

(free) MARKET ECONOMY• Individuals aka Consumers and Producers answer the

three economic questions• NO government regulations or involvement • Involves VOLUNTARY exchange or trade• Adam’s Smith Invisible Hand – leave the economy alone,

and it will work on its own. The relationship between buyers and sellers is natural

• Also called FREE MARKET, PURE MARKET or CAPITALISM• Consumers control many decisions – if they do not like a

certain product/service and do not pay for them, then the producer will stop producing the good/service

Mixed Economy

• Both Government and Individuals answer the three economic questions

• Government should balance the risks of Capitalism while still allowing for individuals to make decisions

• U.S. has “Market” based Mixed economy in which gov’t plays a LIMITED role

• A combination of market and command