Chapter 2Economic Systems

Types of Economic Systems Economic systems are the way a

society uses its scarce resources to satisfy its people’s unlimited wants.

There are three types of economic systems: Traditional Economies Command Economies Market Economies

Traditional Economy Traditional Economy is a system in

which families, clans, or tribes make economic decisions based on customs and beliefs handed down from generation to generation.

Everyone has a role: men hunt, women tend crops and children, even young children help by doing chores

The good of the group takes precedence over individual desires.

Traditional EconomiesAdvantages & Disadvantages

Advantages 1. Clearly answers the three economic

questions2. Produces what is best for survival3. Little disagreement over economic

roles Disadvantages

1. Based on tradition, seldom changes2. Defined job roles limit potential

productivity

Traditional Economy

Command Economy In a command economy, the

government makes all economic decisions.

They decide what will be produced, how they will be produced, and for whom it will be produced.

The government usually owns all means of production – resources and factories.

Individual wants are rarely considered.

Father of Command Economies Karl Marx –

German economist believed in inevitable class struggle between workers and owners.

He predicted workers would overthrow industrialists and seize control of production and place it in government control.

Socialism Socialism is an economic system in

which the government owns some or all of the factors of production.

Democratic Socialism is established through democratic means (voting) rather than violent overthrow of the government.

In this form the government owns basic industries (larger revenue producers).

In some cases they provide universal health care to all citizens

It sounds so good, so what is the catch?

HIGH TAXES

Socialist Countries France

Spain

United Kingdom

Communism Communism is a more extreme form of

socialism in which there is no private ownership of property and little or no political freedom.

In theory, and on paper, communism seeks to make all citizens equal.

In practice, there are numerous disadvantages.

Workers have little motive to increase their productivity because they know they will be paid the same wages regardless of output.

Communist Countries China

Cuba

North Korea

Soviet Union*

Market Economy Market Economies are based on

individual choice, not government decisions.

Consumers and producers drive the economy by purchasing and selling goods and services.

Consumers buy products that best meet their wants and needs, producers benefit from this because they earn money from these purchases.

Usually called Capitalism because it allows private ownership of the factors of production.

True market economies do not exist in the world.

Closest Examples of Market Economies United States * Japan *

Fundamentals of a Market Economy Private Property – the govt ensures

that private property rights are well defined and enforced by law.

Limited Govt Involvement – Laissez Faire “hands off” philosophy states the govt should not interfere in the economy. All market economies have some degree of govt involvement.

Voluntary Exchange in Markets – a trade in which both traders believe that what they are getting is worth more than they are giving up.

Fundamentals of a Market Economy Competition and Consumer

Sovereignty – Competition gives us the choice between products and pricing. Consumer sovereignty states that we have ultimate control over what is produced because we can either buy what we want or reject what we don’t.

Specialization and Markets – Specialization allows people to concentrate their efforts on activities that they do best- teacher, welder, biologist, etc. These occupations might not occur at home, but they remove the need for families to be self-sufficient.

Advantages of Market Economies

Freedom is a key element to market economies

Consumers must be free to make their own economic choices

Workers are allowed to choose their occupation that best meets their desires

Limited government involvement allows for markets to adjust without the government making the changes

Disadvantages of Market Economies A pure market economy does not

provide public goods – education and defense

It does not provide for the sick, elderly, or those who can not contribute economically

There are not restrictions on mistreatment of workers or environmental matters

Comparing Economic SystemsCommunism Socialism Market

System

Who owns resources?

Govt Govt owns basic resources, rest are privately owned

All resources privately owned

How are resources allocated?

Govt planners decide how resources are used

Govt planners allocate basic resources

Market forces allocate resources

What role does govt play?

Govt makes all economic decisions

Govt makes decisions in the basic industries

Govt role is limited – mostly to ensure market forces are free to work

Modern Economies The most common type of

economy today is a mixed economy. It has blend of traditional, command, and market systems.

The United States and Japan are technically mixed economies.

Many European countries are also variances of mixed economies

Chapter 3American Free Enterprise System

Free Enterprise Free enterprise is another name

for capitalism This system allows people to

purchase goods or services that they prefer or to go into business for themselves

What influences people to start their own business?

Profit motive

How are resources allocated? Producers are motivated to sell

their products at the highest price consumers are willing to pay, thus earning a profit.

Consumers on the other hand “vote” by purchasing a product. These “votes” help determine what will be made in the future.

Ex. Compact Disc players were once a hot trend, then they faded as consumers cast their “votes” toward mp3 players and Ipods.

Government and Free Enterprise

The US government plays a limited role in our economy

One way is by producing public goods, which are made by the govt through taxes, and consumed by the public

Examples of public goods are: Street Lighting National Defense Fireworks displays

Shared Responsibilities Public and Private Sectors Both public and private sectors are

responsible for infrastructure, which are the goods and services necessary for the functioning of society

Ex. interstate Highways, airports, seaports, power, water, sewer, and education

Examples of Infrastructure

Public vs. Private Infrastructure

Public Infrastructure (owned by government)

Private Infrastructure (owned independently)

Government Involvement The government also provides a

public safety net for those who are too old or sick to contribute economically.

Ex. Social Security, Medicare, Medicaid, Unemployment, Veteran’s Benefits, Food Stamps