CHAPTER-2

ECONOMIC SYSTEMS

TYPES OF ECONOMIC SYSTEMS Traditional Economies – the allocation of

scarce resources, and nearly all other economic activity, stems from ritual, habit or custom.

Command Economies – are economies in which a central authority makes most of WHAT, HOW, and FOR WHOM decisions. Economic decisions are made by the government.

Market Economies – People and firms act in their own best interests to answer the WHAT, HOW, and FOR WHOM questions.

MIXED ECONOMIES

OR

MODIFIED FREE ENTERPRISE ECONOMY

Most economies in the world today feature some

mix of traditional, command, and market

economies.

The United States has a

combination of command

(planned) and market

economies.

We have a market (free

enterprise) economy with

some government

intervention.

PLACE THE U.S. ECONOMY?

SPECTRUM OF MIXED ECONOMIES

Planned Free Socialism

Nort

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ore

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Hong K

ong

Germ

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India

United S

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Fra

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Russia

Canada

Gre

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Brita

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Chin

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The Role of Government

Makes most, if not all

Economic Decisions

Owns most key resources Promotes competition

and

Supplies' Public Goods

SECTION 2

EVALUATING ECONOMIC

PERFORMANCE

1) Economic Freedom – freedom to make your own economic

decisions

2) Economic Efficiency – benefits gained must be greater than

costs incurred

3) Economic Equity – a strong sense of justice,

impartiality, and fairness

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EVALUATING ECONOMIC

PERFORMANCE CONTINUED

4) Economic Security – protection from

adverse economic events as layoffs and

illnesses

5) Full Employment – to produce as

many jobs as possible

6) Price Stability – steady prices, void of

inflation

7) Economic Growth – to meet the

needs of population growth

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SECTION 3

FREE ENTERPRISE CAPITALISM

In a Capitalistic Economic

System individuals own most

of the factors of production.

This economic system exists

due to free enterprise. In a

free enterprise economy,

competition is allowed to

flourish with a minimum of

governmental interference.

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MAJOR FEATURES OF CAPITALISM

1. Economic Freedom

2. Voluntary Exchange

3. Private Property Rights

4. Profit Motive

5. Competition

COMPETITION & FREE ENTERPRISE

Economic Freedom allows

individuals and businesses

to choose their economic

destiny.

A Voluntary Exchange

happens when both parties

benefit from the transaction.

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COMPETITION & FREE ENTERPRISE CONTINUED

The privilege that entitles

people to own and control their

possessions as they wish is

known as Private Property

Rights.

COMPETITION & FREE ENTERPRISE CONTINUED

Profit is the extent to which

persons or organizations are

better off at the end of a period

than they were at the beginning.

Profit motive is the driving

force that encourages people and

organizations to improve their

material well being.

COMPETITION & FREE ENTERPRISE CONTINUED

The result of Competition is that

goods and services are produced at

the lowest possible cost and

allocated to those who are willing

and able to pay for them.

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THE ROLE OF THE ENTREPRENEUR

The entrepreneur is one of the most important

people in a free enterprise (capitalistic) economy.

The entrepreneur organizes and manages land,

labor, and capital in order to seek the reward

called profit. In other words – Entrepreneurs

make things happen.

THE ROLE OF THE CONSUMER

Consumers play an important role in the

American Free Enterprise economy.

They control what is produced when they express

their wants through purchasing goods and

services.

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THE ROLE OF GOVERNMENT (CONTINUED)

Provider & Consumer –

Federal, State and Local

governments provide goods

and services for citizens. In

the process of providing,

government consumes

factors of production.

THE ROLE OF GOVERNMENT

Protector – The

government protects

property rights and

enforces contracts to

ensure an efficient

and fair economy.

THE ROLE OF GOVERNMENT (CONTINUED)

Regulator – The national government is

charged with preserving competition.

Local and state governments control

businesses with zoning regulations,

taxes, insurance rates, etc.

Promoter of National Goals The government should reflect

the will of the majority of its

people.