Transcript An Introduction to Economics

Chapter 2
Economic Systems
Economic Systems
 Every
economy is trying to find
the “best” way to distribute
scarce resources
 3 Key Economic ?’s
 What
goods should be produced?
 How should they be produced?
 Who consumes these goods?
Goals of an Economy
 The
economic system put in place
depends on what priorities a
society has
 Equity
 Security
 Efficiency
 Freedom
 Full Employment
 Growth
 Price Stability
Kinds of Economic Systems
 Market
 Also
Capitalism
called Free Market, or Free
Enterprise
 Traditional
 Market Democratic
 Usually
referred to as Socialism
 Authoritarian
 Also
Socialism
Socialism
called Communism
Market Capitalism
 Individuals
own
resources and
means of
production
 Basically free
from government
control
Adam Smith
Market Capitalism
People keep the profits
from their hard work
 Goals accomplished:
Freedom, long term
growth, efficiency, price
stability
 Goal weaknesses:
Security, equity, full
employment

Adam Smith
Market Capitalism

Methods
 Competition
 Supply and
Demand
 Consumer
Sovereignty
 Low tax rates,
Limited
government
involvement
Adam Smith
Advantages
 Free
Market Advantages
 Self-Regulating
– produces what is
needed and wanted with no
government interference
 Competition holds prices to the
lowest levels while spurring new
invention
Advantages Cont.
 Free
Market Advantages
 Consumer
Sovereignty – people are
free to buy what they want
 Encourages a very high degree of
economic growth
Disadvantages
 Free
Market Disadvantages
 Economic
equity and security do
not occur in a purely free market
 Market has no incentive to build
“public” goods like roads or libraries
Disadvantages Cont
 Free
Market Disadvantages
 Spillover
costs – some problems
created that effect people who
didn’t cause them
 Ex. - Pollution
Traditional
Economy
does
things as it
always has
Traditional
Goal:
to
maintain the
same tradition
Methods:
resist new
technologies
Traditional
 Examples:
the
Amish in the U.S.,
tribes living within
developed
countries
Market Democratic Socialism
 Socialism
– term implying redistributing
money from the rich to the poor
 Government owns major means of
production (ex. Transportation, Steel,
Oil, etc.)
Market Democratic Socialism
 Goals
accomplished: More equity
and security in the distribution of
income, higher employment rate
 Goals weaknesses: reduced
efficiency, freedom, and growth
Authoritarian Socialism (Communism)
 Government
owns all property
 Total government
control of the
economy
Karl Marx
Authoritarian Socialism (Communism)
Goals accomplished:
equal distribution of
income with no social
classes, full
employment
 Goal weaknesses: very
inefficient, long term
economic decline, no
freedom, high inflation
rate

Karl Marx
Authoritarian Socialism (Communism)
One political party
controls all
government planning
 Realistically
becomes a
dictatorship
 Examples: Old Soviet
Union, Cuba, North
Korea

Karl Marx
Mixed Economies
 Attempt
to get the best out of
free market and central planning
 Government takes action to
protect consumers when it feels it
is necessary
For Example, in the U.S.:
FDA screens food and
drug items to ensure
their safety
 Government breaks up
harmful monopolies
under the Sherman
Anti-Trust Act
 Government provides
welfare benefits to
people who cannot find
a job
