CHAPTER-2
ECONOMIC SYSTEMS
TYPES OF ECONOMIC SYSTEMS
Traditional Economies – the allocation of
scarce resources, and nearly all other
economic activity, stems from ritual, habit
or custom.
 Command Economies – are economies in
which a central authority makes most of
WHAT, HOW, and FOR WHOM decisions.
Economic decisions are made by the
government.
 Market Economies – People and firms act
in their own best interests to answer the
WHAT, HOW, and FOR WHOM questions.

MIXED ECONOMIES
OR
MODIFIED FREE ENTERPRISE ECONOMY
Most economies in the world today feature some
mix of traditional, command, and market
economies.
 The United States has a
combination of command
(planned) and market
economies.
 We have a market (free
enterprise) economy with
some government
intervention.

PLACE THE U.S. ECONOMY?
SECTION 2
EVALUATING ECONOMIC
PERFORMANCE
1)
Economic Freedom –
freedom to make your own economic
decisions
2)
Economic Efficiency –
benefits gained must be greater than
costs incurred
3)
Economic Equity –
a strong sense of justice,
impartiality, and fairness
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EVALUATING ECONOMIC
PERFORMANCE CONTINUED
4)
Economic Security – protection from
adverse economic events as layoffs and
illnesses
5)
Full Employment – to produce as
many jobs as possible
6)
Price Stability – steady prices, void of
inflation
7)
Economic Growth – to meet the
needs of population growth
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SECTION 3
FREE ENTERPRISE CAPITALISM
 In
a Capitalistic Economic
System individuals own most
of the factors of production.
This economic system exists
due to free enterprise. In a
free enterprise economy,
competition is allowed to
flourish with a minimum of
governmental interference.
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MAJOR FEATURES OF CAPITALISM
1.
2.
3.
4.
5.
Economic Freedom
Voluntary Exchange
Private Property Rights
Profit Motive
Competition
COMPETITION & FREE ENTERPRISE
 Economic
Freedom allows
individuals and businesses
to choose their economic
destiny.
A
Voluntary Exchange
happens when both parties
benefit from the transaction.
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COMPETITION & FREE ENTERPRISE CONTINUED
 The
privilege that entitles
people to own and control their
possessions as they wish is
known as Private Property
Rights.
COMPETITION & FREE ENTERPRISE CONTINUED
 Profit
is the extent to which
persons or organizations are
better off at the end of a period
than they were at the beginning.
 Profit
motive is the driving
force that encourages people and
organizations to improve their
material well being.
COMPETITION & FREE ENTERPRISE CONTINUED
 The
result of Competition is that
goods and services are produced at
the lowest possible cost and
allocated to those who are willing
and able to pay for them.
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THE ROLE OF THE ENTREPRENEUR

The entrepreneur is one of the most important
people in a free enterprise (capitalistic) economy.
The entrepreneur organizes and manages land,
labor, and capital in order to seek the reward
called profit. In other words – Entrepreneurs
make things happen.
THE ROLE OF THE CONSUMER
Consumers play an important role in the
American Free Enterprise economy.
 They control what is produced when they express
their wants through purchasing goods and
services.

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THE ROLE OF GOVERNMENT
 Protector
– The
government protects
property rights and
enforces contracts to
ensure an efficient
and fair economy.
THE ROLE OF GOVERNMENT (CONTINUED)
 Provider
& Consumer –
Federal, State and Local
governments provide goods
and services for citizens. In
the process of providing,
government consumes
factors of production.
THE ROLE OF GOVERNMENT (CONTINUED)
 Regulator
– The national government is
charged with preserving competition.
Local and state governments control
businesses with zoning regulations,
taxes, insurance rates, etc.
Promoter of National Goals
The government should reflect
the will of the majority of its
people.
MODIFIED FREE ENTERPRISE
Perhaps an unintended consequence of
government’s role as protector, provider,
regulator, and consumer, is the emergence of the
mixed, or modified free enterprise economy.
 In this economy, people and businesses, carry on
their economic affairs freely, but they are subject
to some governmental intervention and
regulation.
