ECONOMIC SYSTEMS

An economic system is an organized way a society

provides for the wants and needs of its people, or

how a society answers the three basic economic

questions.

Capitalism

Capitalism is based on the theories of

Adam Smith, who wrote The Wealth of

Nations in 1776.

Capitalism is based on the idea of laissez-

faire economics.

Adam Smith is known as the “father” of

capitalism and The Invisible Hand Theory.

Important beliefs include:

Free enterprise (economic freedom)

Freedom of choice

Private property

Profit motive

Competition

Self-interest

The US Economy

The economic system in the United

States is based on a capitalist or market

system. Today it is known as a mixed

market economy due to government

regulation and oversight of the economy.

In a market system, economic decisions

are made by individuals.

What role do patents and copyrights have

in a market economy?

Circular Flow Diagram of a Mixed Economy

Other Economic Systems

Traditional Economies – economic

decisions are based on customs and

beliefs. Family and community ties are

strong.

Command Economies

In command economies decisions are

made by government leaders and

consumer choice is often limited.

Both communism and socialism are

considered command, or planned,

economies.

Communism

Communism is based on the theories of

German philosopher Karl Marx.

Marx wrote The Communist Manifesto in

1848.

Under communism,

factors of production

are collectively

owned and directed

by the state.

Socialism

A system in which the government owns

some factors of production and has a role

in determining what and how goods are

produced.

Private property ownership is allowed to

some degree.

Socialism is considered less efficient than

capitalism.

Most economic systems today are mixed

and fall somewhere in the spectrum

between pure capitalism and pure

communism.

Economic Goals in the American

Free Enterprise System Economic Freedom

Economic Stability

Economic Security

Economic Equity

Economic Efficiency

Economic Growth

Full-Employment

Economic Freedom

The freedom to choose careers, make

business decisions.

Economic Stability

Price stability and stable growth are

critical. Fiscal and Monetary Policies are

used to achieve this goal.

Economic Security

Protection from adverse economic events

such as layoffs and illnesses.

Economic Equity

Equality of opportunity and a fair

distribution of wealth.

Economic Efficiency

The productive use of scarce

resources.

Economic Growth

Sustained period during which a nation’s

total output of goods and services

increases.

Full Employment

Full employment is the lowest possible

unemployment rate, with the economy

growing and all factors of production

being used as efficiently as possible.