EconomicsEconomics

Chapter 2Chapter 2

Section 1Section 1

Economic systemsEconomic systems

Economic system-Economic system- an organized way of an organized way of providing for the wants and needs of the providing for the wants and needs of the peoplepeople

3 major economic systems- traditional, 3 major economic systems- traditional, command and marketcommand and market

Traditional EconomyTraditional Economy

Traditional economies-Traditional economies- the allocation of the allocation of scarce resources and nearly all other economic scarce resources and nearly all other economic activity stems from ritual, habit or customactivity stems from ritual, habit or custom

Many indigenous people around the world live Many indigenous people around the world live by this economyby this economy

Strength- everyone knows what role to play, they Strength- everyone knows what role to play, they know what to produce & how, the for whom know what to produce & how, the for whom question is determined by custom and traditionquestion is determined by custom and tradition

Traditional EconomyTraditional Economy

Disadvantages- tends to discourage new Disadvantages- tends to discourage new ideas and new ways of doing things, ideas and new ways of doing things, punishing people who act differently or punishing people who act differently or break rulesbreak rules

Lack of progress leads to a lower standard Lack of progress leads to a lower standard of livingof living

Command EconomiesCommand Economies

Command economy-Command economy- a central authority a central authority makes most of the what, how, and for makes most of the what, how, and for whom decisionswhom decisions

N. Korea and Cuba are two examplesN. Korea and Cuba are two examples The gov’t determines needs, decided The gov’t determines needs, decided

goals, and sets production quotas for most goals, and sets production quotas for most industriesindustries

The state will shift resources to meet The state will shift resources to meet suspected needssuspected needs

Command EconomiesCommand Economies

Advantages- can change direction drastically in Advantages- can change direction drastically in a relatively short time. Many health and public a relatively short time. Many health and public services are available to everyone at little or no services are available to everyone at little or no cost.cost.

Disadvantages- not designed to meet the wants Disadvantages- not designed to meet the wants of consumers and therefore people are asked to of consumers and therefore people are asked to sacrifice for the good of the state. No incentive. sacrifice for the good of the state. No incentive. How the state judges production can effect the How the state judges production can effect the product. Many clerks, planners, and product. Many clerks, planners, and administrators are needed= slow decisionsadministrators are needed= slow decisions

Market EconomyMarket Economy

Market economy-Market economy- people and firms act people and firms act in their own best interests to answer the in their own best interests to answer the what, how and for whom questionswhat, how and for whom questions

Market is an arrangement for buyers and Market is an arrangement for buyers and sellers to come together to exchange sellers to come together to exchange goods and servicesgoods and services

U.S., Japan, S. Korea, Germany…U.S., Japan, S. Korea, Germany…

Market EconomyMarket Economy

Advantages- over time it can adjust to Advantages- over time it can adjust to change- supply and demand, high degree change- supply and demand, high degree of individual freedom for producers and of individual freedom for producers and consumers, relatively small degree of gov’t consumers, relatively small degree of gov’t interference, everyday economic decisions interference, everyday economic decisions by individuals, almost any product can be by individuals, almost any product can be produced if they have a buyer, and high produced if they have a buyer, and high degree of consumer satisfactiondegree of consumer satisfaction

Market EconomyMarket Economy

Disadvantages- does not provide for the basic Disadvantages- does not provide for the basic needs of everyone, gov’t must provide services needs of everyone, gov’t must provide services that are needed to support various people and that are needed to support various people and needs, jobs come and goneeds, jobs come and go

3 needs- markets must be reasonably 3 needs- markets must be reasonably competitive, (2) resources must be able to move competitive, (2) resources must be able to move (jobs), (3) consumers need access to adequate (jobs), (3) consumers need access to adequate infoinfo

Gov’t must make sure these needs existGov’t must make sure these needs exist