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CHAPTER 2 - CHAPTER 2 ECONOMIC SYSTEMS Economic Systems...

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CHAPTER 2 ECONOMIC SYSTEMS
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Economic Systems Definition: set of institutions & mechanism to answer the following questions: What to produce? How to produce? For whom to produce?
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Economic Systems Two extreme cases of economic systems Pure Capitalism  Pure Command Socialism How to distinguish PC & PCS? C Who owns the means of production? C Who makes the fundamental economic decisions?
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PURE CAPITALISM The means of production are owned privately . The fundamental economic choices are made by individual buyers and sellers interacting in a market .
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PURE CAPITALISM Private Property & Freedom of Choice Private property of means of production (all economic resources are owned by private agents) Freedom to decide... ...what to sell/buy ...how much to sell/buy
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PURE CAPITALISM Self-Interest A. Smith (1776): „An Inquiry into the Nature and Causes of the Wealth of Nations“ „Invisible Hand“ principle When individuals pursue their own interests, markets ensure that they also promote the good of society (as if led by an invisible hand) Example: producers who seek higher profits need to offer cheaper/better products to attract more costumers
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