The Economic System

1
The Economic System
2
Fundamental Questions

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

3
Market Economy

• Decisions on production and consumption are made
  by private individuals acting as buyers and
  sellers.
• Private property, the profit motive, freedom of
  enterprise, competition, supply and demand, and
  consumer choice are important.
• Role of government is limited.
• Example The United States

4
Problems with a Pure Market Economy

• Difficulty enforcing property rights.
• Some people have few resources to sell.
• Some firms try to monopolize markets.
• No public goods.

5
Command Economy

• All decisions on production and consumption are
  made by a central government.
• Examples Nazi Germany and Soviet Union

6
Problems with a Command Economy

• All resources government-owned
• Production coordinated by the central plans of
  government
• Sometimes called communism
• Little choice in jobs or products

7
Traditional Economy

• Decisions on production and consumption are based
  upon customs, beliefs, rituals, and habits.
• Change and growth are slow.
• Non-industrial
• Agriculture is usually the main activity.

8
Mixed Economy

• Combines features of more than one of the
  traditional, command, and market systems.
• Most economies (including the U.S.) are mixed
  economies.

9
Role of U.S. Government in the Economy

• Provides public services, regulates economic
  activity, and promotes economic growth and
  stability.
• Prior to the Great Depression, the role of
  government was limited.
• Social Security, the Food and Drug
  Administration, taxes, antitrust legislation,
  environmental regulations, tariffs, and the
  Federal Reserve are all example of government
  involvement in the economy today.