Chapter 2Chapter 2

Economic SystemsEconomic Systems

Economic SystemsEconomic Systems

Every economy is trying to Every economy is trying to find the “best” way to find the “best” way to distribute scarce resourcesdistribute scarce resources

3 Key Economic ?’s3 Key Economic ?’sWhat goods should be What goods should be

produced?produced?How should they be produced?How should they be produced?Who consumes these goods?Who consumes these goods?

Goals of an EconomyGoals of an Economy

The economic system put in The economic system put in place depends on what place depends on what priorities a society haspriorities a society has

EquityEquity

EfficiencyEfficiency

Full Full EmploymentEmployment

Price StabilityPrice Stability

SecuritySecurity

FreedomFreedom

GrowthGrowth

Kinds of Economic SystemsKinds of Economic Systems

Market CapitalismMarket CapitalismAlso called Free Market, or Also called Free Market, or

Free EnterpriseFree EnterpriseTraditionalTraditionalMarket Democratic SocialismMarket Democratic Socialism

Usually referred to as SocialismUsually referred to as SocialismAuthoritarian SocialismAuthoritarian Socialism

Also called CommunismAlso called Communism

Market CapitalismMarket Capitalism

Individuals own Individuals own resources and resources and means of means of productionproduction

Basically free Basically free from from government government controlcontrol

Adam Smith

Market CapitalismMarket Capitalism

People keep the People keep the profits from their profits from their hard workhard work

Goals accomplished: Goals accomplished: Freedom, long term Freedom, long term growth, efficiency, growth, efficiency, price stabilityprice stability

Goal weaknesses: Goal weaknesses: Security, equity, full Security, equity, full employmentemployment

Adam Smith

Market CapitalismMarket Capitalism

MethodsMethodsCompetitionCompetitionSupply and Supply and

DemandDemandConsumer Consumer

SovereigntySovereigntyLow tax rates, Low tax rates,

Limited Limited government government involvementinvolvement Adam Smith

AdvantagesAdvantagesFree Market AdvantagesFree Market Advantages

Self-Regulating – produces what Self-Regulating – produces what is needed and wanted with no is needed and wanted with no government interferencegovernment interference

Competition holds prices to the Competition holds prices to the lowest levels while spurring new lowest levels while spurring new inventioninvention

Advantages Cont.Advantages Cont.Free Market AdvantagesFree Market Advantages

Consumer Sovereignty – Consumer Sovereignty – people are free to buy what people are free to buy what they wantthey want

Encourages a very high degree Encourages a very high degree of economic growthof economic growth

DisadvantagesDisadvantagesFree Market DisadvantagesFree Market Disadvantages

Economic equity and security Economic equity and security do not occur in a purely free do not occur in a purely free marketmarket

Market has no incentive to Market has no incentive to build “public” goods like roads build “public” goods like roads or librariesor libraries

Disadvantages ContDisadvantages ContFree Market DisadvantagesFree Market Disadvantages

Spillover costs – some Spillover costs – some problems created that effect problems created that effect people who didn’t cause thempeople who didn’t cause them

Ex. - PollutionEx. - Pollution

TraditionalTraditional

Economy Economy does things does things as it always as it always hashas

TraditionalTraditional

Goal: to Goal: to maintain the maintain the same traditionsame tradition

Methods: Methods: resist new resist new technologiestechnologies

TraditionalTraditional

Examples: the Examples: the Amish in the Amish in the U.S., tribes living U.S., tribes living within developed within developed countriescountries

Market Democratic SocialismMarket Democratic Socialism

Socialism – term implying Socialism – term implying redistributing money from the rich redistributing money from the rich to the poorto the poor

Government owns major means of Government owns major means of production (ex. Transportation, production (ex. Transportation, Steel, Oil, etc.)Steel, Oil, etc.)

Market Democratic SocialismMarket Democratic Socialism

Goals accomplished: More Goals accomplished: More equity and security in the equity and security in the distribution of income, higher distribution of income, higher employment rateemployment rate

Goals weaknesses: reduced Goals weaknesses: reduced efficiency, freedom, and growthefficiency, freedom, and growth

Authoritarian Socialism Authoritarian Socialism (Communism)(Communism)

Government Government owns all owns all propertyproperty

Total Total government government control of the control of the economyeconomy

Karl Marx

Authoritarian Socialism Authoritarian Socialism (Communism)(Communism)

Goals accomplished: Goals accomplished: equal distribution of equal distribution of income with no income with no social classes, full social classes, full employmentemployment

Goal weaknesses: Goal weaknesses: very inefficient, long very inefficient, long term economic term economic decline, no freedom, decline, no freedom, high inflation ratehigh inflation rate

Karl Marx

Authoritarian Socialism Authoritarian Socialism (Communism)(Communism)

One political party One political party controls all controls all government planninggovernment planningRealistically Realistically

becomes a becomes a dictatorshipdictatorship

Examples: Old Soviet Examples: Old Soviet Union, Cuba, North Union, Cuba, North KoreaKorea

Karl Marx

Mixed EconomiesMixed Economies

Attempt to get the best out of Attempt to get the best out of free market and central free market and central planningplanning

Government takes action to Government takes action to protect consumers when it protect consumers when it feels it is necessaryfeels it is necessary

For Example, in the U.S.:For Example, in the U.S.: FDA screens food and FDA screens food and

drug items to ensure drug items to ensure their safetytheir safety

Government breaks Government breaks up harmful up harmful monopolies under the monopolies under the Sherman Anti-Trust Sherman Anti-Trust ActAct

Government provides Government provides welfare benefits to welfare benefits to people who cannot people who cannot find a jobfind a job