Ch.
2 - ECONOMIC SYSTEMS
Command (Centrally
Mixed Market
Planned)
Traditional
Ch. 2 - ECONOMIC SYSTEMS
Today’s Objectives
I can contrast the different aspects of traditional, command, market, and
mixed economic systems
I can categorize countries based on their economic system
I can differentiate nationalization and privatization
I can explain laissez-faire economics
I can evaluate the positive and negative elements of each economic system
I can categorize economic systems based on the amount of government
involvement
Traditional Command Market Mixed
Ch. 2 - ECONOMIC SYSTEMS
Three Fundamental Economic Questions
1. What to Produce? Guns vs. Butter
The problem of scarcity imposes a restriction
on the ability to produce everything we want
during a given period.
Ch. 2 - ECONOMIC SYSTEMS
Three Fundamental Economic Questions
2. How to Produce?
Vs.
How do we mix technology and scarce resources
in order to produce goods and services?
Ch. 2 - ECONOMIC SYSTEMS
Three Fundamental Economic Questions
3. For Whom to Produce?
Society must have a method to decide
who will be “rich” and who will be “poor”.
Ch. 2 - ECONOMIC SYSTEMS
5 Economic Goals
Economic Making the most of resources
Efficiency
Economic Efficiency
Economic Freedom from government intervention in the
Freedom Economic
production Freedom
of goods and services
Assurance that goods and services will be available ,
Economic Security
Economic
and Predictability
Security
payments andon
will be made Predictability
time, and a safety net will
protect individuals in times of economic disaster
Fair distribution of wealth
Economic Equity Economic Equity
Economic Growth Innovation leads to economic growth, and economic
Economic
and Innovation
Growth
growth leads andstandard
to a higher Innovation
of living
Ch. 2 - ECONOMIC SYSTEMS
Traditional Economies
Relies on habit, or ritual to decide how to
answer the 3 economic questions.
• Revolves around the family
• Work divided along gender lines
•Slow to adopt new technology or ideas
Ch. 2 - ECONOMIC SYSTEMS
Centrally Planned (Command) Economies
The government owns both the land and capital and decides on behalf of
the people how to answer the 3 economic questions – requires absolute
loyalty from the people
• Communism - Government controls all aspects of production
• Socialism – government owns some FOP –
•Some private ownership of business in socialism
Attempts to
provide for
everyone
Ch. 2 - ECONOMIC SYSTEMS
Free Market Economies
Individuals and privately owned businesses own the factors of
production and decide how to answer the 3 economic questions
• Specialization of tasks makes the economy more efficient
• Everyone acts in their own self-interest
• No government intervention
• Laissez Faire –
•French phrase to “leave things alone” or “hands-off”
•Voluntary Exchange: a trade in which the parties involved anticipate
that benefits will outweigh the costs
Ch. 2 - ECONOMIC SYSTEMS
Mixed Economies
Elements of traditional, command, and market economies
- Most common economic system
Traditional - Farming Market – Public Market Command – Highways
Ch. 2 - ECONOMIC SYSTEMS
Mixed Economies
The people answer the 3 economic questions with some
intervention from the government to account for market failures
• Economic decisions are made by individuals with government oversight
• Government is a key component of economic activity
• All nations exist in the “mixed economy continuum”
Centrally Planned Free Market
Iran France United United States
N. Korea Sweden Kingdom
Russia Singapore
Cuba Peru Canada
Ch. 2 - ECONOMIC SYSTEMS
Today’s Objectives
I can differentiate nationalization and privatization
I can explain laissez-faire economics
I can identify the elements of the circular flow
diagram
I can evaluate how the factor and product market
interrelate on the circular flow diagram
Factor market Households
Product market Businesses
Ch. 2 - ECONOMIC SYSTEMS
Adam Smith’s Invisible Hand
Self-interest and competition work
together to regulate the
marketplace
Laissez-faire= hands-off
government
Ch. 2 - ECONOMIC SYSTEMS
Ch. 2 - ECONOMIC SYSTEMS
Circular Flow of Money
wa
inte ges, r
res e
men
ts Factor Market $ t, p nt,
or P
a y $ rofi
ts
Fact
$
F.O $ $
L.L.C .P
Households
Businesses
Supp s and
l y Product Market Good
es
servic
$ $ $
Expe
n ditur $ e mand
e s $ D
Ch. 2 - ECONOMIC SYSTEMS
Modern Economies
Privatization: Nationalization:
National companies Private companies
become privately become nationally
owned owned
Ch. 2 - ECONOMIC SYSTEMS
Modern Economies
Privatization: Nationalization:
National companies Private companies
become privately become nationally
owned owned
Faster, Safer, and
Cheaper transportation
has led to an increased
global economy
