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Every society grapples with three fundamental economic questions: What to produce? How to produce it? For whom? The answers define an economic system, which coordinates the production and consumption of goods and services. Economic goals—including freedom, efficiency, equity, growth, security, and stability—vary in importance among societies, influencing how they prioritize these objectives. This overview explores traditional, command, market, and mixed economies, the role of government, and the principles of a free enterprise system.
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Who or what decides what you get? Economic Systems
Who Gets What? How Do Societies Decide? • Every society must answer three fundamental economic questions: what to produce, how, and for whom? • In answering the three economic questions, every society develops an economic system: a way of coordinating the production and consumption of goods and services
Who Gets What? How Do Societies Decide? • How societies answer these questions depends on their economic goals: • freedom, efficiency, equity, growth, security, and stability. • Societies differ in the degree of importance they attach to each goal. Progress towards one goal can sometimes be achieved only at the expense of another.
Economic Goals • economic freedom: the ability to make our own economic decisions without interference from the government. • economic equity: the fair and just distribution of society’s wealth • What is “fair” and “just”? • economic growth: when an economy produces more and better goods and services
Economic Goals • economic security: basic needs like food, shelter, and health care are provided for everyone. • economic stability: the goods and services we count on are there when we want them • Electricity on demand, grocery stores stocked, etc. • economic efficiency: an economy makes the most of its resources, including full employment (when all who want to work can find jobs)
Economic Goals • freedom efficiency equity growth security stability • How would you personally rank these goals in order of importance?
The Factor Market • In the factor market, households sell their land, labor, and capital to firms. • factor payments: the funds paid to households in exchange for these factors • If you have ever received a paycheck, you received a factor payment.
Mixed Economy • Today, all economies are mixed economies in which the government takes some role. • At minimum, they establish a legal system to enforce laws, and a stable system of currency. • They can also step in to regulate firms to ensure worker and consumer safety, limit pollution, etc. • Finally, they can provide certain goods or services that the market otherwise would not – things like public works (dams, highways, sewer systems, etc.)
Government’s Role • In addition to public works and services, the government in many countries also provides payments like social security and welfare checks, food stamps, etc. • transfer payments: money, collected in the form of taxes and paid to others by the government in the form of benefits
The Mixed Economy Continuum • Mixed economies vary in their degree of freedom – from free to repressed. • In 2008, the Heritage Foundation and the Wall Street Journal published their annual Index of Economic Freedom…
A Free Enterprise System … no, not that Enterprise.
A Free Enterprise System • In a free enterprise system, as in the United States, individuals own the factors of production and make decisions about how to use those factors within the framework of the law. • Seven key characteristics: economic freedom, competition, equal opportunity, property rights, binding contracts, profit motive, and limited government
The Power To Choose • What economic changes does Estonia's former prime minister argue gave his country one of the freest economies in the world? • Which economic change do you think was most crucial in Estonia's case?
