Economics Unit 2economic systems

Essential Question:

•What are the advantages and disadvantages of the different economic systems used by countries to answer the 3 basic economic questions to meet a standard of living for its population?

Essential Terms/Concepts •Trade-Off•Opportunity Cost•Cost-Benefit Analysis •Standard of living •Traditional Economy •Command Economy•Market Economy

•Mixed Economy •Economic freedom•Voluntary exchange•Private Property Rights•Profit Motive•Competition

Standard of Living- quality of life based on our needs and wants. What should everyone have?

• For America-

Cost Benefit Analysis-Evaluate alternatives • Trade-Off- alternative

choices when ever an economic decision is made.

•Opportunity Cost- the cost of the next best alternative use of money, time, or resources.

Traditional

• -An economic system where tradition and custom govern economic decisions • -Economic activities are usually centered toward the family, tribe, or

ethnic group • -Resources are allocated based on inheritance • -Farming, hunting, and gathering are done largely in the same fashion

as the generation before • -Choices are determined by environment • -Little or no use of technology

Traditional Economy- Not many left Advantages • Little uncertainty of how

to answer the 3 economic questions. •What?- Your family farms

you farm. They hunt to hunt•How?- Just like Dad• Whom?- determined by

customs and traditions

Disadvantages •Discourages new ideas

and new ways of doing things• Lack of progress and very

constricting • lower standard of living

Command

• -The government or other central authority makes all economic decisions • -Individuals have little, if any, influence over economic functions • -Resources are owned by the government • -There is no competition; the purpose of business is to provide goods

and services, not to make a profit • -Factories are concerned with quotas • -Consumers have few, if any, choices in the market place • -The government sets the prices of goods and services

Command “Communist "economies- Few left Cuba, North Korea Advantages • Can focus its factors of production quickly

because all major decisions are centralized. • Typically many public services such as

education and health-care available to the majority of the people. Quality varies • -Serves people collectively instead of

individuals; focus on equality • -Distributes wealth among all of society • -Products produces fulfill needs

Disadvantages • Not designed to meet the wants

of consumers• No or little incentive to be

productive because all receive similar wages.• Little or no innovation• -Often there is insufficient

resource distribution, ie. Shortages and/or surpluses

What changes is Cuba making to their economy?• Have allowed trade with some foreign countries• Have allowed the use of the dollar• Have allowed small “State” controlled markets to open up.

What have been the positive outcomes in Cuba?

The United Emirates- Command Economy?

Market Economy

• -Economic decisions are made by individuals competing to earn profits based on supply and demand • -Resources are owned by individuals • -Profit, not quotas, is the motive for increasing work • -Competition determines price and increases the quality of products • -Individual freedom is considered very important; individuals have

freedom to make economic decisions • -Also called “capitalist” economy

Market EconomiesAdvantages • -Prices determine by market forces

(supply and demand); competition brings down prices • -Consumers can buy whatever they

like in whatever amounts they want • -Adjusts to change easily • -Little government intervention • -Great variety of goods and

services • -Capital flows to where

Disadvantages • Does not always provide basic

needs of everyone in society, which can lead people to slip into poverty • -May make it difficult for

government to provide adequate social services • -There are occasionally market

failures • -People can make choices which are

harmful to themselves and to others

Mixed Economy

• -Combines elements of pure market and command economies; Government and individuals share the economic decision making process • -Government guides and regulates production of goods and services • -Resources are owned by individuals • -Government serves to protect both producers and consumers from

unfair policies and practices

Mixed economy

Advantages• *See advantages of command

and market economic systems • -Can focuses on social welfare

and political freedom, as well as individual liberties

Disadvantages • *See disadvantages of command

and market economic systems • -May not lead to optimal use of

resources • -Government intervention can

hinder progress

Comparative Economic Systems

• 1. How can the presence or Scarcity of natural resources and arable land affect a nation’s economy, regardless of the type of economic system?

• 2. How can life expectancy and literacy rates affect the quality of a countries Human Resources in the economy?

• 3. How can fertility rates affect the use of scarce resources?

• 4. How can GDP per capita and poverty rates indicate standards of living in each system?

• 5. How can the size of the industrial/service sector and the agriculture employment rate indicate the level of industrialization?

• 6. How can electricity, communication, and transportation facilities indicate the potential for industrial growth?

• 7. Considering the lack of natural resources, the labor problems, and the lack of capital and little industrialization of developing countries, how can developing countries develop? (Hint: Look at Economy - Overview for Chad).

• 8. Now that you have studied the economic characteristics of these three countries, define the terms market-oriented, command, and developing economy in your own words. For each term, describe the specific characteristics of the countries you studied that would help to support your definition.