ECONOMIC SYSTEMS Every society has an Economic System: the method used by a society to produce and distribute goods and services → a society determines what type of economic system it is going to use based on its own goals and values
ECONOMIC SYSTEMS No matter the type of economic system a society employs, it must answer the following three economic questions: 1. What goods and services should be produced? → What are we going to make? 2. How should these goods and services be produced? → How are we going to make it? 3. Who consumes these goods and services? → Who gets the stuff we make?
ECONOMIC GOALS Society’s answer the three economic questions, and thus determine the type of economic system they use, based on their economic goals and societal values → it is impossible to pursue all goals equally, therefore, in pursuing certain goals, society’s will pay an opportunity cost in pursuing other goals
ECONOMIC GOALS Economic efficiency→ making the most of resources Economic freedom → freedom from government intervention in the production and distribution of goods and services Economic security and predictability → assurance that goods and services and the ability to pay for them will be available and a safety net (unemployment insurance, FDIC, social security, etc.) will protect individuals in times of economic difficulty Economic equity → fair distribution of wealth Economic growth and innovation → innovation leads to economic growth, and economic growth leads to a higher standard of living * Society’s can pursue many other goals such as stability and environmental protection, but we will focus on the list above
MARKET ECONOMIES Markets allow people who specialize in the production and/or distribution of specific goods and services (nobody is totally self-sufficient) to sell what they have and buy what they need → Specialization leads to efficient use of resources
MARKET ECONOMIES • In a free market system, the factors of production are owned by individuals and individuals answer the three economic questions → free markets are based on voluntary exchange and thrive in an environment of decentralized decision-making
MARKET ECONOMIES → because producers have incentives to meet consumers desires, consumers decide what gets produced in a market economy; this power is known as consumer sovereignty
ADAM SMITH AND THE FREE MARKET • 18th-century economist Adam Smith explained how the basic functions of a free market operate in his famous book The Wealth of Nations published in 1776(!) → Smith described self-interest as the motivating force of a free market, while competition (the struggle among producers for the money of consumers) acts as the regulating force
ADAM SMITH AND THE FREE MARKET → self-interest and competition work together to produce what Adam Smith called ‘the invisible hand of the marketplace’, meaning consumers get the products they want at a price close to the cost of producing them without any central plan or director
ADAM SMITH AND THE FREE MARKET → in order for the free market to work properly, Smith called for a policy of ‘laissez faire’ which means the government should let individuals be as free as possible to make their own decisions
PUBLIC GOODS AND SAFETY NETS • In market economies, governments still provide some public goods: shared goods/services that would be inefficient or impractical to make individuals pay individually and to exclude nonpayers → public goods are financed by the public sector (the government); transactions involving individuals and businesses take place in the private sector
PUBLIC GOODS AND SAFETY NETS → examples of public goods include roads, dams, national parks, etc.
PUBLIC GOODS AND SAFETY NETS • Most market economies also provide some form of government-provided safety net for the very young, the very old, the sick, the poor and the disabled → Examples of the safety net in the U.S. include: TANF (Temporary Assistance for Needy Families), Social Security, Unemployment insurance and workers compensation
THE U.S. AND FREE ENTERPRISE • The United States free market economy can be characterized as one of free enterprise, with a high degree of economic freedom and limited government intervention (w/some arguing for more gov’t, others for less) → characteristics of free enterprise include: the profit motive, open opportunity (everyone can compete), private property rights, free contract (nobody can force you into signing a contract), voluntary exchange (you decide what you want to buy/sell)
THE U.S. AND FREE ENTERPRISE • The U.S. gov’t provides protection of consumers through public disclosure laws requiring companies to share information about the products they sell → the gov’t also protects Americans by regulating private industry (though not directly involved with running businesses, it does impose restrictions), such as with environmental laws → examples of regulating gov’t agencies include the EPA (Environmental Protection Agency) and the FDA (Food and Drug Administration)