Overview
This lecture introduces the three main types of economic systems—free market, centrally planned, and mixed economies—explaining how each allocates scarce resources and addresses key economic questions.
Deciding Who Gets Resources
- Allocation methods include highest GPA, intended major, lottery, volunteering, or authority decision.
- Each method uses different criteria reflecting values like merit, chance, need, or authority.
Introduction to Economic Systems
- An economic system determines how society allocates scarce resources.
- Three core economic questions: What to produce? How to produce? For whom to produce?
- Answers to these depend on social values and goals.
Free Market Economy (Market Economy)
- Advocated by Adam Smith; also called laissez-faire economics.
- Operates with minimal or no government interference.
- Firms produce goods based on consumer demand; consumers act to maximize utility.
- "Invisible hand" refers to natural market forces regulating the economy.
- Government’s role is limited to protecting property rights for fair competition.
- Allocation is guided by supply, demand, and price mechanisms.
Centrally Planned Economy (Command Economy)
- Advocated by Karl Marx; decisions made by the government.
- Government owns all resources and controls all production and distribution.
- Common in dictatorships or empires; leaders decide societal needs.
- Example: North Korea and fictional Panem from Hunger Games.
- Tends to appear in less developed countries with more political corruption.
Mixed Economy (Keynesian Economy)
- Combines free market (private sector) and government intervention (public sector).
- Government steps in to correct market failures and provide essential services.
- Most countries, including the US, have mixed economies.
- Encourages both individual enterprise and government action for social welfare.
- Macroeconomics studies mixed economies.
Market Failures
- Productive inefficiency: Resources wasted producing at higher-than-necessary costs (e.g., US healthcare system).
- Allocative inefficiency: Market fails to provide enough of what society needs (e.g., vaccinations, public safety).
Key Terms & Definitions
- Economic System — The mechanism a society uses to allocate scarce resources.
- Free Market Economy — An economy where private actors freely interact without government intervention.
- Centrally Planned Economy — An economy where the government controls all economic decisions.
- Mixed Economy — An economy blending private enterprise and government intervention.
- Invisible Hand — Natural market forces that guide resource allocation.
- Productive Inefficiency — Wasting resources by producing at excessive costs.
- Allocative Inefficiency — Failure to produce what society most needs.
Action Items / Next Steps
- Review the differences among economic systems.
- Prepare to focus on mixed economies and macroeconomics in the next class.