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Chapter 2

Chapter 2. Economic Systems. Answering the 3 Basic Economic Questions. Every economy is trying to find the “best” way to distribute scarce resources. Answering the 3 Basic Economic Questions. What goods and services will the economy produce? How should these goods and services be produced?

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Chapter 2

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  1. Chapter 2 Economic Systems

  2. Answering the 3 Basic Economic Questions • Every economy is trying to find the “best” way to distribute scarce resources

  3. Answering the 3 Basic Economic Questions • What goods and services will the economy produce? • How should these goods and services be produced? • Who is going to consume these goods and services?

  4. Kinds of Economic Systems • Market Capitalism (a.k.a. Free Market, Free Enterprise) • Traditional • Market Democratic Socialism (a.k.a. Socialism) • Authoritarian Socialism (a.k.a. Communism)

  5. Market Capitalism • Individuals own resources and means of production • Basically free from government control Adam Smith

  6. Market Capitalism • Goal: to motivate people through economic reward • People keep the profits from their hard work Adam Smith

  7. Market Capitalism • Characteristics • Private Property • Freedom of Choice • Self-Interest • Profit Motive • Supply and Demand • Competition • Limited Government Adam Smith

  8. Market Capitalism • Examples : U.S., Australia, South Africa, Chile • Political System : Democracy Adam Smith

  9. Traditional • Economy does things as it always has

  10. Traditional • Goal: to maintain the same tradition • Methods: resist new technologies

  11. Traditional • Examples: the Amish in the U.S., tribes living within developed countries • Political System: Tribal Organization

  12. Market Democratic Socialism • Socialism – term implying redistributing money from the rich to the poor • Government owns major means of production (ex. Transportation, Steel, Oil, etc.)

  13. Market Democratic Socialism • Goal: Equal distribution of income • Methods • High Taxes • Benefits paid to low income individuals

  14. Market Democratic Socialism • Examples: Norway, Mexico, Canada • Political System: Socialistic Democracy

  15. Authoritarian Socialism (Communism) • Government owns all property • Total government control of the economy Karl Marx

  16. Authoritarian Socialism (Communism) • Goals: equal distribution of income with no social classes Karl Marx

  17. I’ve made $8950! This really bites! Surplus Value $9000 $50 Pay $1000 $10,000

  18. Authoritarian Socialism (Communism) • Methods • Working class revolts against the rich owners • One political party controls all government planning Karl Marx

  19. Authoritarian Socialism (Communism) • Characteristics • Public Ownership • Centralized Decision Making • Economic Planning • Allocation by Command Karl Marx

  20. Authoritarian Socialism (Communism) • Examples: Old Soviet Union, Cuba, North Korea • Political System: Totalitarian Communism Karl Marx

  21. Authoritarian Socialism (Communism) • Key Terms from Communist Manifesto • Proletariat – the average worker who (according to Marx) is exploited by capitalism Karl Marx

  22. Authoritarian Socialism (Communism) • Key Terms from Communist Manifesto • Bourgeoisie – the rich, ruling class that uses the proletariat to make money Karl Marx

  23. Great Moments in Presidential Speeches

  24. Free Market Advantages Self-Regulating – produces what is needed and wanted with no government interference Free Market Disadvantages Free Market vs. Central Planning

  25. Free Market Advantages This self regulating is a result of people acting on self-interest and incentives Free Market Disadvantages Free Market vs. Central Planning

  26. Free Market Advantages Competition holds prices to the lowest levels while spurring new invention Free Market Disadvantages Free Market vs. Central Planning

  27. Free Market Advantages Consumer Sovereignty – people are free to buy what they want Free Market Disadvantages Free Market vs. Central Planning

  28. Free Market Advantages Encourages a very high degree of economic growth Free Market Disadvantages Free Market vs. Central Planning

  29. Free Market Advantages Free Market Disadvantages Economic equity and security do not occur in a purely free market Free Market vs. Central Planning

  30. Free Market Advantages Free Market Disadvantages Market has no incentive to build “public” goods like roads or libraries Free Market vs. Central Planning

  31. Free Market Advantages Free Market Disadvantages Spillover costs (negative externalities) – some problems created that effect people who didn’t cause them Ex. - Pollution Free Market vs. Central Planning

  32. Mixed Economies • Attempt to get the best out of free market and central planning • Government takes action to protect consumers when it feels it is necessary

  33. For Example, in the U.S.: • FDA screens food and drug items to ensure their safety • Government breaks up harmful monopolies under the Sherman Anti-Trust Act • Government provides welfare benefits to people who cannot find a job

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