Economic Systems
Chapter 2
The Three Economic Questions
Chapter 2, Section 1
Economic Systems
• Method
used by society to produce & distribute
goods/services
•
The economic system employed by a society
depends on its goals
•
To determine the goals, a society asks three key
economic questions…
1 of 3 Key Economic Questions
• What
•
to produce?
…in order to satisfy needs and wants
(How much is devoted to defense, education, health
and welfare etc…)
2 of 3 Key Economic Questions
• How
•
should products be produced?
Electricity
•
Oil, solar, wind power?
3 of 3 Key Economic Questions
• Who
consumes these goods/services?
•
How are goods distributed?
•
How is income distributed?
•
Factor payments
•
income received for providing the factors of production
Economic Goals
1. Efficiency
•
Maximize the use of resources
2. Freedom
•
Governments may or may not intervene in economic freedom
3. Security and Predictability
•
Assurance that goods and services will be available
•
Safety net is provided (government programs)
Economic Goals (cont.)
4. Economic equity
• Fair
distribution of wealth
5. Economic Growth and Innovation
• Innovation=growth=higher
standard of living
6. Other goals
• Environmental
protection, medical care, employment
Economic Goals Depend on
Needs/Wants
• Not
•
all goals can be met equally
Trade-offs
• This
•
is why there are varying economic systems
Emphasis on different goals result in societies
pursuing different economic systems
Trade-Offs
• Equity
•
Freedom
•
Efficiency
•
Security/Predictability
•
Growth/Innovation
•
Other Goals
Types of Economic Systems
• Traditional
Economies
• Subsistence
• Rely
on tradition
• Little
• Low
type lifestyles.
surplus
Standard Of Living
• Market
Economies
• Decisions
are made
by individuals
• Known
as free
markets or capitalism
Types of Economic Systems
• Centrally
planned
economies (command)
• Government
answers
the three economic
questions
• Communism
• Mixed
economies
• Combination
of
traditional, market,
and centrally
planned economies