The allocation of scarce resources among competing uses. What are the scarce resources?
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ECONOMIC SYSTEMS
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The study of how to distribute limited resources
the study of how people choose to use scarce resources to satisfy their wants.
What is Economics?
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Economic System The organization of an economy, which
represents a country’s distinct set of social custom, political institutions, and economic practices
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Economic System All societies must deal with the problem
of scarcity. They must make choices about resource allocation because their resources are limited and they must strive to use their resources as efficiently as possible
There are 3 basic economic questions that must be answered by all societies
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3 Basic Economic Questions That Any Society Must Answer What to produce How to produce For whom to produce
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4 main economic systems Traditional Market Command Mixed
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Market economy (capitalism) An economic system based on private
ownership Economic decisions are answered
largely by the market (the buyers and sellers’ decisions in the marketplace)
Individuals are free to pursue their own self-interest
The government seldom intervenes
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Market Economy Is consumer-centered and innovative but
creates inequality and instability Profit acts as the incentive for production Consumers help sellers decide what to
produce for those who are willing and able to pay for these products
Resources flow to those industries producing profitable products
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Command Economy (socialism/ communism) All productive property, natural
resources and capital are in the hands of the government
Central planners decide on what should be produced, how production should be carried out and how the output should be distributed
Equalizes income but often lacks freedom.
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Traditional Economy An economic system in which economic
decisions are made on the basis of custom and tradition
The way outputs are distributed remain the same from generation to generation
Resources are allocated by inheritance Focuses on non-economic concerns and
have tight social constraints.
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Traditional Economy The level of technology is low and pace
of life is generally slow Can be found in places in South
America, Africa and rural places in Asia
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Mixed Economy It is only in theory that a country is purely
a market or a command economy because each system has serious flaws
Most economies are a mix of market and command systems
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Mixed Economy
An economic system that combines aspects of a market economy and a command economy
Production decisions are made both in private markets and by the government
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Range of Economic Systems
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Index of Economic Freedom www.heritage.org/index
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Economic Goals There are seven major economic goals:
economic efficiencyincome equityprice stabilityfull employmentviable balance of paymentseconomic growthenvironmental sustainability
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Complementary and Conflicting Economic Goals
Economic goals may be complementary.An example is the relationship between full
employment and economic growth. Economic goals may be conflicting.
An example is the relationship between price stability and economic growth.
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
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Economic Goals1. Economic Efficiency
- getting the highest benefit from an economy’s scarce resource
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Economic Goals2. Income Equity
- a country’s output is distributed fairly
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Economic Goals3. Price Stability
- maintaining a general level of prices for goods
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Economic Goals4. Full Employment
- increase employment rate to fully utilize the country’s human resources
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Economic Goals5. Viable Balance of Payments
- ensure a balance between exports and imports
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Economic Goals6. Economic Growth
- Economic growth will lead to an outward shift in the production possibilities curve, leading to higher standard of living
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Economic Goals7. Environmental Sustainability
- the quality of the physical environment should be sustained