Economic Systems

1. Economic Systems

3. Economic Systems- the method used by society to produce and
distribute goods and services.
Put more simply….
How our society tells us what we can get, and how we can get it!

4. All economic systems must consider the following
questions:
1) What goods and services to produce?
2) How to produce them?
3) Who will get them?
Each of these economic systems answers these questions in a
different way.

5. Adam Smith
Invisible Hand
“He generally, indeed, neither intends to promote
the public interest, nor knows how much he is
promoting it...he intends only his own gain, and
he is in this, as in many other cases, led by an
invisible hand to promote an end which was no
part of his intention. Nor is it always the worse for
the society that it was no part of it. By pursuing
his own interest he frequently promotes that of
the society more effectually than when he really
intends to promote it.”

6. Warm-up
2/1/16
What are the three questions all economic systems must
consider?

7. Free Market Economy
Economic questions are answered by individual buyers and
sellers.
Supply and demand influence economy
People act out of self-interest; motive for profit (money) drives
the economy
Private ownership

8. Command Economy
The government answers the basic economic questions
Advantages: able to act quickly in emergencies, and provide for all people equally
Disadvantages: Inefficient. No incentive to work hard or be creative
Public ownership
ex) Communist countries (China, Vietnam, North Korea, Former Soviet Union, Cuba)

9. Mixed Economy
Most economies are neither pure Free Market, or pure
Command. They have elements of both.
Decisions about how resources should be used are made partly
by public sector, and partly by private sector.
While the United States is mostly a free market economy, it

10. Features of American
Free Market Economy
Economic Freedom: Individuals have the right to choose
Competition: More than one producer of goods/services insures choice
Private Property: Individuals have the right to own their own property, including
business.
Self-interest: Individuals makes decisions based on what is best for them
Voluntary exchange: Individuals may freely buy and sell goods

11. Features of American Command Economy
Government regulation of some business practices
Ex) Wages, labor hours, safety practice
Government limits certain choices
Ex) Cannot buy or produce certain goods/services
Government provides aid to the needy
Ex) Medicare, medicaid, welfare

12. My Pizzeria!
Let’s see how my pizzeria would operate under different economic systems….

13. My Pizzeria in a Free Market Economy
I answer the basic economic questions…
I determine how much cheese and pepperoni goes on the pizza.
I determine the quality of the cheese and pepperoni.
I set my employees wages.
I set my business hours.

14. My Pizzeria in a Command Economy
The government answers the basic economic questions
The government sets the amount of cheese and pepperoni on each pizza.
The government determines quality of cheese and pepperoni.
The government sets employee's wages.
The government sets business hours.
Problem: Does the government know that much about pizzerias?

15. My Pizzeria in a Mixed Economy
The Government and I both answer the basic economic questions
I determine the amount of cheese and pepperoni on the pizzas; government
determines the quality of cheese and pepperoni.
I set employees wages; government sets minimum wage for employees.
I determine business hours; government determines whether my business is safe to
be open or not.