4 Types of Economic Systems Market Economy/ Capitalism – Characteristics: private citizens own factors of production – Businesses make there own decisions Supply & demand set the price, and producers & consumers base their decisions on prices Decentralized – Decisions based on all people within the economy – Economy runs by itself because no one coordinates decisions. Make sure market is competitive through government regulations. Government handles the side effects, that influence third parties High Per Capita GDP
4 Types of Economic Systems Command Economy/ Controlled Economy/ Communism/ Socialism – Characteristics: People have little say so on how economy functions – Decisions made by central government All resources owned by government People have less economic freedom because controlled by government – Fewer choices Have planning agencies to make decisions & control all parts of the economy Grows slow because of inefficiency Low Per Capita GDP
4 Types of Economic Systems Mixed Economy – Most countries under this economic system – Characteristics: Private ownership of property People make decisions based on: themselves and government intervention & regulations Traditional Economy “do it the way it has always been done” – Decisions based on custom or habit
Scarcity Helps society through trade and the formation of new industries & inventions. Causes fundamental economic problems because: – Not enough productive resources, to produce all of societies goods and services that cover each individuals wants and needs. Reasons why consumers have to make choices among alternatives (opportunity cost).
Factors of Production Natural Resources Labor – Varies in size due to: population, immigration, education, war & disease. – Affects quantity & quality
Factors of Production Capital/ Capital Goods – Results of production – Satisfy wants indirectly by helping production of consumer goods (directly) Entrepreneurs – Innovative people willing to take risk, to gain a profit. – Driving force of the USA economy, because we use the factors of production to produce new products.
Gross Domestic Product (GDP) Only consider the final count, new products. – Reasons: cannot double count Measuring the GDP can help compare the number of goods & services produced and get an idea of its worth.
Gross Domestic Product (GDP) Important indicator of the standards of living – If the GDP grows faster than the population, then there will be more goods & services for people to enjoy – Higher GDP will cause increases in standards of living
Business Cycle/ Circular Flow Chart Each aspect of the cycle is affected by: – Consumers Earn the income in the factor markets – Businesses People receive their income and they spend it on the product market – Uses to pay for natural resources, labor, capital, etc. – Resources are used to produce more products to sell – Governments Produces and purchases goods – Foreign Markets Goods & services USA buys & sells to other countries