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Understanding Economic Systems: Markets, Command, and Their Impact on Decision Making

This chapter explores various economic systems, including pure capitalism, socialism, and communism, alongside the nuances of a mixed economy. It highlights the fundamental principles of the market system, such as freedom of enterprise and competition, and discusses economic goals like efficiency, equity, and growth. The text also addresses the three essential questions of production: what, how, and for whom goods and services are produced, and examines how these decisions are influenced by market dynamics.

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Understanding Economic Systems: Markets, Command, and Their Impact on Decision Making

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  1. 2 C H A P T E R Economic Systems & Decision Making

  2. ECONOMIC SYSTEMS • THE MARKET SYSTEM • Pure Capitalism • Laissez-faire • “Let it be” • THE COMMAND SYSTEM • Socialism • Communism

  3. ECONOMIC SYSTEMS TRADITIONAL SYSTEM • Based on habits and/or customs • Tribal, indigenous MIXED ECONOMY • Has elements of two or more systems.

  4. ECONOMIC GOALS • Economic Freedom • Economic Efficiency • Economic Equity • Economic Security • Full Employment • Price-Level Stability • Economic Growth Identify the T R A D E O F F S COMPLIMENTS

  5. The Market System

  6. FREEDOM OF ENTERPRISE & CHOICE PRIVATE PROPERTY SELF- INTEREST COMPETITION CAPITALIST IDEOLOGY

  7. FREEDOM OF ENTERPRISE & CHOICE PRIVATE PROPERTY SELF- INTEREST COMPETITION ACTIVE, BUT LIMITED, GOVERNMENT MARKETS & PRICES CAPITALIST IDEOLOGY

  8. 1 Hong Kong 3 Ireland 5 United States 20 Belgium 31 Spain 48 France 101 Brazil 126 China 134 Russia 148 Venezuela 156 Cuba 157 North Korea GLOBAL PERSPECTIVE Index of Economic Freedom, Selected Nations Rankings among 157 nations, 2008 FREE MOSTLYFREE MOSTLYUNFREE REPRESSED

  9. THE MARKET SYSTEM AT WORK The Three Fundamental Questions... What will be produced?

  10. THE MARKET SYSTEM AT WORK The Three Fundamental Questions... What will be produced? How will the goods be produced?

  11. THE MARKET SYSTEM AT WORK The Three Fundamental Questions... What will be produced? How will the goods be produced? Who will get the goods and services?

  12. WHAT WILL BE PRODUCED? Those goods and services that make a profit. • Profit = Total Revenue – Total Cost

  13. HOW WILL THE GOODS AND SERVICES BE PRODUCED? • Least Cost Production • Maximizing output while minimizing cost.

  14. WHO WILL GET THE GOODS AND SERVICES? • The market determines the price. • Those willing to pay that price receive the goods and services. • Income is the key.

  15. THE CASE FOR THE MARKET SYSTEM • Efficiency • Incentives • Freedom

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