The Economic SystemThe Economic System

Fundamental QuestionsFundamental Questions

What goods and services should be What goods and services should be produced?produced?

How should these goods and services How should these goods and services be produced?be produced?

For whom should these goods and For whom should these goods and services be produced? (Who will services be produced? (Who will consume these goods and services?)consume these goods and services?)

Market EconomyMarket Economy

Decisions on production and Decisions on production and consumption are made by private consumption are made by private individuals acting as buyers and individuals acting as buyers and sellers.sellers.

Private property, the profit motive, Private property, the profit motive, freedom of enterprise, competition, freedom of enterprise, competition, supply and demand, and consumer supply and demand, and consumer choice are important.choice are important.

Role of government is limited.Role of government is limited. Example: The United StatesExample: The United States

Problems with a Pure Market Problems with a Pure Market EconomyEconomy

Difficulty enforcing property rights.Difficulty enforcing property rights. Some people have few resources to Some people have few resources to

sell.sell. Some firms try to monopolize Some firms try to monopolize

markets.markets. No public goods.No public goods.

Command EconomyCommand Economy

All decisions on production and All decisions on production and consumption are made by a central consumption are made by a central government.government.

Examples: Nazi Germany and Soviet Examples: Nazi Germany and Soviet UnionUnion

Problems with a Command Problems with a Command EconomyEconomy

All resources government-ownedAll resources government-owned Production coordinated by the Production coordinated by the

central plans of governmentcentral plans of government Sometimes called Sometimes called communismcommunism Little choice in jobs or productsLittle choice in jobs or products

Traditional EconomyTraditional Economy

Decisions on production and Decisions on production and consumption are based upon consumption are based upon customs, beliefs, rituals, and habits.customs, beliefs, rituals, and habits.

Change and growth are slow.Change and growth are slow. Non-industrialNon-industrial Agriculture is usually the main Agriculture is usually the main

activity.activity.

Mixed EconomyMixed Economy

Combines features of more than one Combines features of more than one of the traditional, command, and of the traditional, command, and market systems.market systems.

Most economies (including the U.S.) Most economies (including the U.S.) are mixed economies.are mixed economies.

Role of U.S. Government in the Role of U.S. Government in the EconomyEconomy

Provides public services, regulates Provides public services, regulates economic activity, and promotes economic economic activity, and promotes economic growth and stability.growth and stability.

Prior to the Great Depression, the role of Prior to the Great Depression, the role of government was limited.government was limited.

Social Security, the Food and Drug Social Security, the Food and Drug Administration, taxes, antitrust legislation, Administration, taxes, antitrust legislation, environmental regulations, tariffs, and the environmental regulations, tariffs, and the Federal Reserve are all example of Federal Reserve are all example of government involvement in the economy government involvement in the economy today.today.