Economic SystemsTraditional, Command and Market Economies

The 3 Fundamental Economic Questions

What to produce?

How to produce it?

For whom to produce it?

Economic GoalsMost societies try to address some or all of the following 6 goals:

1. Economic freedom- Individuals and businesses have the right to make decisions about how to use their resources without government interference.

2. Economic efficiency - Allocating resources so that the greatest number of consumers get what they want without waste. Strives for full employment.

3. Economic equality - Fair and just distribution of society’s wealth.

4. Economic growth - Production of more goods and services. Key elements = Scientific and technological innovation. Results in an improved standard of living.

5. Economic security - Seeks to provide food, shelter and health care to the less fortunate.

6. Economic stability - Goods and services we count on are there when we want them.

Societies must weigh tradeoffs and opportunity costs of pursuing any particular set of economic goals.

Differing Economic SystemsTraditional Economies: Decision-making by custom. The highest goals are economic stability and security.

What? Traditional products.

How? Labor is often divided among clans.

For Whom? Hierarchy of society; In the end, everyone gets enough.

Command Economies: Decision-making by powerful rulers. The highest goals are equity and security.

What? Determined by ruler; public works projects.

How? Determined by ruler; Often use conscripted laborers.

For Whom? Determined by ruler; Often hierarchy of distribution.

Market Economies: Decision-making by individuals. The highest goals are efficiency and freedom.

What? Determined by individuals guided by self-interest.

How? Determined by individual businesses.

For Whom? Determined by what the public is willing to pay for items.

The “Invisible Hand” - By everyone pursuing their own interests, society is benefited as a whole.

The Flow of Money and Goods in a Market Economy

The Circular Flow Model- Money, goods and resources circulate in a market economy.

Capitalism gives rise to Socialism and Communism

1848- Karl Marx’s Communist Manifesto -

“From each according to his ability, to each according to his needs.”

See handout with Rock, Paper, Scissors Game.

Modern Command Economies: Decision-making by the State

Soviet Union (1917-1991)- Private property was forbidden; State owned the factors of production; Central planning committees decide on what, how and for whom to produce; Committees controlled prices and wages; shortages were common; Workers lacked incentive to innovate or produce high quality goods.

Mixed Economies Divide Decision-making

Most countries have mixed economies - Both government and individuals play a role in production and consumption.

The Government’s role - Protection, regulation and public benefits.

What government provides varies from country to country.

Levels of freedom vary widely.

The Index of Economic Freedom ranks countries based on 10 indicators, including property rights and freedom from corruption.

Key Characteristics of the U.S. Economic System

Seven Key Characteristics of the Free Enterprise System:

1. Economic freedom- Laissez-faire - Little government interference.

2. Competition- Lower costs, better consumer goods.

3. Equal Opportunity- Every citizen has the right to compete.

4. Binding Contracts- Both sides have to fulfill their end of the deal.

5. Property Rights- We have the right to buy, sell and control the use of our property. Property is protected by laws, patents and copyrights.

6. Profit Motive- Provides incentive to work and create new businesses.

7. Limited Government- Laws and agencies regulate, but do not operate businesses.