Economic SystemsChapter 2

Essential QuestionWhat are the advantages and

disadvantages of the various world economies?

Economic SystemsThree Basic QuestionsDue to scarcity, individuals, governments, and

businesses, must make decisions about what to produce. The type of economic system that a

nation uses will dictate who makes these decisions.

Question 1: What Should be Produced?

Question 2: How Should It be Produced?

Question 3: For Whom Should It be Produced?

Chapter 2 Section 1

Societies use their scarce resources to

satisfy unlimited wants

Economic Systems

Traditional Economy

Command EconomyMarket

Economy

Traditional Economies

Advantages Disadvantages

Traditional Economies

Command Economies

Socialism Communism

Who owns the resources?

How are resources allocated?

What role does government play?

Karl Marx

Major Accomplishment: Detailed analysis of capitalism and foundation for socialist economic theory in two famous works The Communist Manifesto (1848) and Das Kapital (1867, 1894)

Famous Quotation: “Workers of the world, unite! You have nothing to lose but your chains.”

Influenced: Russian Revolution (1917), Chinese Revolution (1979)

What is a Market?

It is any place or situation in which people buy and sell resources, goods, and services

It is based on the voluntary exchange of goods and services.

Price is the determining factor for what will be produced, how it will be produced, and for whom it will be produced.

Adam SmithFounder of Classical Economics

“Every individual… intends only his own gain, and he is in this, as in

many other cases, led by an invisible had to promote an end which was no

part of his intention.”From Wealth of Nations

• Individuals pursue their own self interest

• Free markets

• Limited regulation by the government

Private Proper

ty

•must be actively enforced by law

•guarantees the owner the right to exchange the property for some other gainLimited

Government

Involvement

•Laissez-faire•Capitalism: producers act on their own to provide goods and services that consumers demand

Voluntary

Exchange

•Both sides believe they are getting a deal

Competition &

Consumer Sovereign

ty

•All sellers in a market will try to get buyers to purchase their products.

•Consumers are free to purchase what they want and therefore have ultimate control over what is produced

Specializati

on

•Buyers and sellers are able to concentrate their efforts in areas where they have an advantage

Fundamentals of a Market Economy

http://www.classzone.com/cz/books/econ_cnc11/resources/htmls/animated_economics/ec02_anim_circflow.html

Circular Flow Model

Four Basic Types of Economic Systems

Traditional

Command

Market

Mixed

People & Perspectives

Economists

John Stuart MillHis ideas formed the basis of a mixed

economy system

Goal of Utilitarianism:”“ The distribution of wealth…depends on the laws and customs of society…. Society can subject the distribution of wealth to whatever rules it thinks best.”

In Principles of Political Economy (1848) he emphasized• Production and

distribution as separate processes

• Distribution regulated by the government in order to achieve the utilitarian goal

Utilitarianism: the idea that society should adopt policies promoting “the greatest happiness of the greatest number

Discuss

How is the United States’ economic system a mixed economy?

How does it embody the goal of utilitarianism?

Characteristics of the American Economy

In a free market economy, who makes the decisions about what should be produced, what should be produced, and for whom should it be

produced?

Characteristics of the American Economy

American Economy

Private Property

Competition

Limited role of government

Freedom of EnterpriseFreedom of

Choice

Profit Incentive