Economics Principles & Practices

Chapter 2: Economic Systems and Decision Making

Chapter Overviews

Economic systems help societies provide for the wants and needs of their people. This chapter deals with the main types of economic systems, the way in which the performance of economic systems can be evaluated, along with the nature of capitalism and free enterprise.

Section 1 introduces the three systems—traditional, command, and market economies—that have evolved over the years. In the traditional economy, the WHAT, HOW, and FOR WHOM questions are answered by tradition, customs, and even habits handed down from generation to generation. In a command economy, a central authority answers the three basic questions. In a market economy, decision making is decentralized with consumers and entrepreneurs playing a central role.

Section 2 examines seven major economic and social goals—economic freedom, economic efficiency, economic equity, economic security, full employment, price stability, and economic growth—on which most people seem to agree. These goals are important, because they can be used to evaluate the performance of an economic system. If the system does not perform as people would like, people can lobby for laws to achieve their goals. One example would be the Social Security program that was enacted to achieve the goal of economic security.

Section 3 deals with capitalism and economic freedom. Free enterprise, another term used to describe the American economy, refers to the competition that is allowed to flourish with a minimum of government interference. The key to the market economy is the economic freedom and voluntary exchange that takes place in a way that makes everyone better off. The entrepreneur is the risk-taking individual in the economy that starts new businesses and undertakes new ways of doing things in search of profits. The consumer is sometimes thought of as being "king" or sovereign of the market, and government is involved in the economy primarily because people want it to be involved. Because of the government involvement, the American economy can also be described as a mixed economy, or a modified private enterprise economy.