From the PPF, we understand that it is impossible to produce as much of every good as we might want, so choices must be made. Different economic systems will make different choices. There are two major economic systems: capitalism and socialism, but most countries use some combination of the two known as a mixed economy.
In pure or laissez-faire capitalism, there is private ownership, and markets and prices coordinate and direct economic activity. In socialism, there is public (state) ownership, and central government planning coordinates economic activity. Socialists believe that government decision makers are persons who promote the best interests of society as a whole and make every effort to obtain the information needed to make the right decision. However, capitalists think that government is more likely to respond to producers who have the political power to lobby congress than to consumers who do not lobby. Central government planning may favor special –interest groups at the expense of the rest of the society. Therefore, government’s role should be limited to order maintenance. Pure capitalism is an abstract model. The economy is self-regulating.
The U.S. system is a mixed economy, but closer to pure capitalism. There are two major markets (product and resources market), and three major sectors (household, business, government) in the domestic economy. In the product market, goods and services are produced in the business sector and sold to households. In return, businesses get revenue from the household as they pay for the goods and services. In the resources market, resources are supplied by the households. Businesses pay for the desired resources, which produce good and services. In return, households get income, which they will use to pay for the goods and services. U.S. government collects taxes from both sectors, buys goods and services from the businesses, pays for resources they employed, provides services and will intervene by their policies according to different market situations.
