Chapter 2 Presentation 1

Economic Systems

Economic System

• A system used to coordinate an economy and determine what types of goods are produced, how many goods, and who gets the goods

Differences in Economic Systems

• 1. who owns the factors of production• 2. the method used to motivate, coordinate,

and direct economic activity (ie $, fear)

• Polar opposites: Command System and Market Economy

Command System

• Communism is considered a command economy

• Government ownership of property and many decisions are made through a central planning agency

• ***a pure command economy has all decisions made by the government

Current Command Economies

• China• Cuba• Laos• North Korea• Vietnam

North Korea at Night

Market System (Capitalism)

• Characterized by private ownership of resources and the use of markets and prices to coordinate and direct economic activity

• Leads to competition between independent buyers and sellers

Laissez-Faire

• “Let it Be”• Pure capitalism in which the

government “keeps its hands off” and lets business run its course

Characteristics of a Market System

1. Private Property- land, capital and intellectual property (patents, copyrights and trademarks)

2. Freedom of Enterprise- freedom to obtain and use resources to produce and sell goods/services

3. Freedom of Choice- allows consumers to buy/sell, workers can enter any field if they are qualified

Characteristics of a Market System Contd.

4. Self- Interest- each economic unit tries to achieve its own particular goal (ex. Entrepreneurs try to maximize profit)

5. Competition- 2 or more buyers and sellers acting independently and freedom of buyers and sellers to enter or leave the market

Characteristics of a Market System Contd.

6. Specialization- an individual, firm, region, or nation produces one or a few goods and services rather than the entire range of goods and services

7. Division of Labor- the separation of the work required to produce a product into a number of different tasks that are performed by different workers

Characteristics of a Market System Contd.

8. Use of Money- medium of exchange and a store of value

9. Active but limited government

Consumer Sovereignty

• Determination by consumers of the types and quantities of G/S that will be produced with the scarce resources of the economy• Give their “dollar votes”