Chapter 2. Types of Economic Systems Economic system: how society uses resources to satisfy peoples...
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Transcript of Chapter 2. Types of Economic Systems Economic system: how society uses resources to satisfy peoples...
Chapter 2
Types of Economic Systems
Economic system: how society uses resources to satisfy
people’s wants
Three basic systems: Traditional Command market economies
Types of Economic Systems
Traditional Economy centers on families,
clans, or tribes decisions are
based on customs and beliefs
Good of the group always comes before individual desires
Characteristics of Traditional Economies Advantages and Disadvantages
Advantages: little disagreement over goals, roles methods of production, distribution
determined by custom Disadvantages: as result of resistance to
change, less productive do not use new methods; people not in jobs
they are best suited for low productivity results in low standard of
living
Types of Economic Systems cont.
Command Economy (centrally planned
economy) government makes economic decisions determines what to
produce; how to produce; who gets products
determines who is employed, work hours, pay scales
Wants of individual consumers rarely considered
Government owns means of production: resources and factories
Government Controls EXAMPLE: Socialism and Communism
Karl Marx influenced some societies to adopt command economies socialism—government owns some of the
factors of production communism—no private property; little
political freedom Authoritarian system requires total
obedience to government communism is authoritarian socialism
Karl Marx: Economic Revolutionary A New View of Economics
Marx lived during Industrial Revolution Argued factory owners used workers as
resource exploited workers by keeping wages low to
increase profits workers would rebel, establish classless
society Wrote The Communist Manifesto (with
Friedrich Engels), Das Kapital
Government Controls Socialism and
Communism Democratic socialism
established under democratic political process government owns basic
industries other industries private central planners make
decisions for government-owned industries
central planners might control other sectors, such as health care
Command Economies Today
No pure command economies todaymodern telecommunications bringing about change
Some economies still have mostly command elements
Command Economies Today North Korea
Communist North Korea used resources for military, not necessities built large army; nuclear
weapons program In 1990s and early
2000s, millions died of hunger, malnutrition
In 1990s, production decreased and economy shrank
Since 2003, some market activity allowed
Command Economies Today
Impact of Command Economies In theory, command systems fair to
everyone; In practice, many disadvantages central planners do not understand local
conditions workers have little motivation to be
productive or conserve resources artificially low prices lead to shortages people sacrificed to carry out centrally
planned policies
Types of Economic Systems cont.
Market Economy driven by choices of
consumers and producers consumers spend
money, go into business, sell their labor as they wish
producers decide how to use their resources to make the most money
Consumers, producers benefit each other when they act in self-interest
Fundamentals of a Market Economy 1: Private Property and Markets 2:Limited Government Involvement
Laissez faire—government should not interfere in economy
Capitalism—system having private ownership of factors of production says producers will create products consumers
demand Actual market economies all have some
government involvement
Fundamentals of a Market Economy 3: Voluntary Exchange in Markets
Voluntary exchange—traders believe they get more than they give up
4: Competition and Consumer Sovereignty Consumer sovereignty—buyers choose
products, control what is produced Competition controls self-interested
behavior sellers offer low price or high value to please
consumers, make profit
Fundamentals of a Market Economy 5: Specialization and Markets
Specialization—people concentrate their efforts in the activities they do bestencourages efficient use of resources
leads to higher-quality, lower-priced products
Circular Flow in Market Economies KEY CONCEPTS
Circular flow model illustrates how interactions occur in a market
Represents the two key decision makers: households, businesses
Shows the two markets where households and businesses meet goods and services resources
Circular Flow in Market Economies
Factor Markets Factor market—market for the factors of
production land, labor, capital, entrepreneurship
Product Markets Product market—market where goods and services
bought and sold includes all purchases by individuals from
businesses
Circular flow model shows how market economies operate
Green- Flow of $$Teal- flow of resources and products
Impact of Market Economies Advantages Individuals free to make economic choices,
pursue own work interests Less government control means political
freedom Locally made decisions mean better use of
resources, productivity Profit motive ensures resources used
efficiently, rewards hard work resulting competition leads to higher-
quality, more diverse products
Impact of Market Economies Disadvantages Pure market economy has no way to
provide public goods and services Does not give security to sick or aged During U.S. industrial boom, business
owners rich, workers low pay Businesses did not address problems
caused by industrialization Industrialized societies adopt some
government control of economy
Today’s Mixed Economies Mixed economy
has elements of traditional, command, market systemsmost common type of economic system
Traditional, command, market economies adopt elements from others
Today’s Mixed Economies Life in a Mixed Economy
Family farming in U.S. serves as example of mixed economy traditional: all members
of family help bring in harvest
command: affected by government—public school, roads, Social Security
market: own land, sell their products in competitive market
Today’s Mixed Economies
Types of Mixed Economies U.S. basically has market system European countries greater mix of market
and command elements France—government controls some
industries; provides social services Sweden—state owns part of all companies;
lifelong benefits, high taxes Namibia—traditional; state supports market,
foreign investment
Trends in Modern Economies Changes in
Ownership Nationalize is to
change from private to government ownership
Privatize is to change from government to private ownership