+ Happy Monday!! 
BW: Why do you think
the PPC is important?
Economic Systems
Who or what decides what you get?
+
Learning Target
 Compare
how the various economic
systems (traditional, market,
command, mixed) answer the
questions:
 What to produce?
 How to produce?
 For whom to produce?
+
What Is An Economic System?
 Economic
system - The method used by a
society to produce and distribute goods
and services.
 But
 By
how?
answering the 3 economic questions!
 What?... How?... Who?
+
What Are These Economic
Systems You Speak Of?
Traditional
economy
Command
economy (Centrally-
planned)
Market
Mixed
economy (Free-market)
economy
+
Traditional Economy
 answers
the
economic questions
based on cultural
traditions, habits, or
rituals
 relatively
small
communities
 generally
agricultural
economies
+
Traditional Economy
 strong
families,
religious beliefs
 low
standard of
living
 little
room for
innovation
Ex: Amish or tribal
communities
+ Command (Centrally-Planned)
Economy
 Relies
on government or
central planning
community to answer
economic questions
 Individuals
have little or no
say in economic planning
 Little
individual freedom or
choice
 The
government has control
or owns resources
Ex: Cuba, North Korea, Iran
+
Socialism vs. Communism
Socialism
 Social
and political
philosophy based on
belief that democratic
means should be used
to distribute wealth
evenly throughout a
society.
Communism
 Political
system
characterized by a
centrally-planned
economy with all
economic and political
power resting in the
hands of the
government.
+ Karl Marx

Author of The Communist
Manifesto.

Coined the term “communist.”

Philosophy said there is built-in
value in labor, and that it is much
more valuable than wealth

Believed that government should
be in the hands of the collective,
led by workers, and not capitalists.

His work formed the economic
basis of communist countries like
the Soviet Union.

EOC: Be familiar with Karl Marx.
+
Advantages/Disadvantages of a
Centrally-Planned Economy
Advantages
 Concentration
of
Production: can focus
all of their production
on one particular
industry as necessary.
 When especially can
this be a good thing?
Disadvantages

Concentration of Production:
can focus all of their
production on one particular
industry as necessary.
 To the exclusion of
everything else.
 Poor-quality goods,
shortages, slow production.
 Its major advantage is also
its major disadvantage.
+
Adam Smith
Text
Book
Page 30
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Unit 2 – Political Systems
Bellwork:
How
do traditional economies
answer the 3 economic questions?
What type of economy are they most
likely to have?`
+
The Free Market
What
Why
have you bought recently?
didn’t you make it yourself?
Market Economy
 Individuals
answer
economic questions
 Individuals
& businesses use
the market to exchange
goods & money
 Market: an
arrangement
allowing buyers and sellers to
exchange g&s
 Individuals
& private
businesses, own & control
resources
Market Economy
 Specialization

leads to economic efficiency
Specialization: Focus on a particular thing, especially one we’re good at.
 More
innovative & higher technology
 The market is driven by self-interest – their own personal
gain
Ex: United States, Canada, Hong Kong
+
Market Economy
 also
called free-enterprise or capitalism
 strong
sense of competition- rivalry
between companies
 incentives
encourage individuals &
businesses to behave in a certain way
 businesses
are motivated by profitsfinancial gain
+
Adam Smith & Self-Interest
Smith – Scottish economist in the 1700s
 Adam
 Wealth
of Nations- written in 1776 describes how a market
system can flourish
 Called
for economic laissez faire- restricted government
involvement
 The
market is driven by an Invisible Hand - self-interest
impulse that leads people to satisfy their own wants &
needs

Consumers will buy only g&s they want; no producer will make
something no one wants to buy.
 Ultimately,
 EOC:
society benefits
Know Adam Smith & “Invisible Hand”
+
Advantages of the Free Market
Efficiency. As a self-regulating system, a free
market economy is efficient.
Growth. Free markets encourage growth because
competition encourages innovation.
Freedom. Of all systems we’ll study, free market
economies have the highest degree of economic
freedom.
Variety. Wider variety of g/s than other economic
systems.
The Free Market Economy
 In
a free market economy,
households and business
firms use markets to
exchange money and
products. Households
own the factors of
production and consume
goods and services.
Market. Guess
what we sell here. 
Households are going to
give money to firms to
buy g/s. (monetary flow)
Firms supply households
with g/s. (physical flow)
Circular Flow Diagram of a Market
Economy
Households pay
Product market
firms for goods
and services.
monetary flow
physical flow
Firms supply
households with
goods and services.
Households
Households supply
firms with land, labor,
and capital.
Firms
 Product
physical flow
monetary flow
Factor market
Firms pay
households for land,
labor, and capital.
The Free Market Economy


Factor Market. “Factor”
is another name for
“resource.” Where have
we seen “factor” used
before?
On the factor side, firms
are going to buy land,
labor and capital from
the households
(monetary flow), and
households are going to
supply firms with land,
labor and capital
(physical flow).
Circular Flow Diagram of a Market
Economy
Households pay
Product market
firms for goods
and services.
monetary flow
physical flow
Firms supply
households with
goods and services.
Households
Households supply
firms with land, labor,
and capital.
Firms
physical flow
monetary flow
Factor market
Firms pay
households for land,
labor, and capital.
The Free Market Economy
 Monetary
flow.
Households buy g/s
from firms. Firms buy
factors of production
from households.
 Physical
flow. Firms
provide g/s to
households.
Households provide
factors of production
to firms.
Circular Flow Diagram of a Market
Economy
Households pay
Product market
firms for goods
and services.
monetary flow
physical flow
Firms supply
households with
goods and services.
Households
Households supply
firms with land, labor,
and capital.
Firms
physical flow
monetary flow
Factor market
Firms pay
households for land,
labor, and capital.
Mixed Economy
 Combines
the elements of traditional, command,
and market economies
 The
government has varying degrees of
involvement:
 regulates business
 provides a safety net for those in need
 All
economies are actually mixed: some tend to
lean toward 1 “pure” system & are classified as
such
Government’s Role in a Mixed Economy
In a mixed economy,
 Product
market.
The government
purchases g/s from
firms. They receive
taxes from
households.
Circular Flow Diagram of a Mixed
Economy
Product market
monetary flow
physical flow
Households
market. The
government
purchases the factors
of production from
households. They
receive taxes from
firms.
expenditures
Government
 Factor
physical flow
monetary flow
Factor market
expenditures
Firms
Government’s Role in a Mixed Economy
In a mixed economy,
 Monetary
Flow.
Transactions
between households
and firms are taxed
by the government.
 Physical
Flow.
Government receives
g/s from firms, and
factors of production
from households.
Circular Flow Diagram of a Mixed
Economy
Product market
monetary flow
physical flow
Households
expenditures
Government
physical flow
monetary flow
Factor market
expenditures
Firms
Government’s Role in a Mixed Economy



Expenditure. Another
word for expenditure is
“spending.” It’s an
economic term you need
to recognize.
The government provides
expenditures to both
business and firms. The
expenditures come from
taxes collected.
Government transfer the
money from taxes to
households and
businesses for a variety
of reasons.
 Like what?
Circular Flow Diagram of a Mixed
Economy
Product market
monetary flow
physical flow
Households
expenditures
Government
physical flow
monetary flow
Factor market
expenditures
Firms
Government’s Role in a Mixed Economy



Expenditure. Another word
for expenditure is
“spending.” It’s an
economic term you need to
recognize.
The government provides
expenditures to both
business and firms. The
expenditures come from
taxes collected. Government
transfer the
money from taxes to
households and businesses
for a variety of reasons.

Social Security

Medicaid

Tax breaks for businesses
Circular Flow Diagram of a Mixed
Economy
Product market
monetary flow
physical flow
Households
expenditures
Government
physical flow
monetary flow
Factor market
expenditures
Firms