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Economic System

Economic System. An economic system is the set of mechanisms and institutions that resolves how and to whom resources will be distributed within a society. Some standards used to distinguish among economic systems are: Who owns the resources?

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Economic System

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  1. Economic System • An economic system is the set of mechanisms and institutions that resolves how and to whom resources will be distributed within a society. • Some standards used to distinguish among economic systems are: • Who owns the resources? • What decision-making process is used to allocate resources and products? • What types of incentives guide economic decision makers?

  2. Pure Market Economy • All resources are privately owned • Coordination of economic activity is based on the prices generated in free, competitive markets • Any income derived from selling resources goes exclusively to each resource owner

  3. Invisible Hand of Markets • According to economist Adam Smith (1723–1790), market forces coordinate production as if by an “invisible hand.” • Published in his book Wealth of Nations.

  4. “It’s Your money, not the government’s”- President Ronald Reagan

  5. Problems with Pure Market Economies • Difficulty enforcing property rights • Some people have few resources to sell • Some firms try to monopolize markets • No public goods

  6. Command Economy • All resources government-owned • Production coordinated by the central plans of government • Sometimes called communism • Use visible central planners

  7. Command Economy- Typically begin with revolutions.

  8. Karl Marx was the founder of the communist/ command economy ideology. He claimed that as long as there existed a business owning class oppression would continue. Published in books Das Kapital and the Communist Manifesto.

  9. Problems with Command Economies • Consumers get low priority • Little freedom of choice • Central planning can be inefficient • Resources owned by the state are sometimes wasted • Environmental damage

  10. Mixed Economy • United States is a mixed economy • Also considered a market economy • Government regulates the private sector in a variety of ways.

  11. John Maynard Keynes claimed that economies would benefit from deficit spending if it led to higher employment rates.

  12. President Franklin Roosevelt introduced the principles of a mixed economy to the US by expanding the government, providing welfare and establishing Social Security for the elderly.

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