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Chapter 2. Types of Economic Systems Economic system: how society uses resources to satisfy peoples wants Three basic systems: Traditional Command market.

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Presentation on theme: "Chapter 2. Types of Economic Systems Economic system: how society uses resources to satisfy peoples wants Three basic systems: Traditional Command market."— Presentation transcript:

1 Chapter 2

2 Types of Economic Systems Economic system: how society uses resources to satisfy peoples wants Three basic systems: Traditional Command market economies

3 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

4 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

5 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

6 Government Controls EXAMPLE: Socialism and Communism Karl Marx influenced some societies to adopt command economies socialismgovernment owns some of the factors of production communismno private property; little political freedom Authoritarian system requires total obedience to government communism is authoritarian socialism

7 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

8 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

9 Command Economies Today No pure command economies today modern telecommunicati ons bringing about change Some economies still have mostly command elements

10 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

11 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

12 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

13 Fundamentals of a Market Economy 1: Private Property and Markets 2:Limited Government Involvement Laissez fairegovernment should not interfere in economy Capitalismsystem having private ownership of factors of production says producers will create products consumers demand Actual market economies all have some government involvement

14 Fundamentals of a Market Economy 3: Voluntary Exchange in Markets Voluntary exchangetraders believe they get more than they give up 4: Competition and Consumer Sovereignty Consumer sovereigntybuyers choose products, control what is produced Competition controls self-interested behavior sellers offer low price or high value to please consumers, make profit

15 Fundamentals of a Market Economy 5: Specialization and Markets Specializationpeople concentrate their efforts in the activities they do best encourages efficient use of resources leads to higher-quality, lower-priced products

16 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

17 Circular Flow in Market Economies Factor Markets Factor marketmarket for the factors of production land, labor, capital, entrepreneurship Product Markets Product marketmarket where goods and services bought and sold includes all purchases by individuals from businesses Circular flow model shows how market economies operate

18 Green- Flow of $$ Teal- flow of resources and products

19 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

20 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

21 Todays Mixed Economies Mixed economy has elements of traditional, command, market systems most common type of economic system Traditional, command, market economies adopt elements from others

22 Todays 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 governmentpublic school, roads, Social Security market: own land, sell their products in competitive market

23 Todays Mixed Economies Types of Mixed Economies U.S. basically has market system European countries greater mix of market and command elements Francegovernment controls some industries; provides social services Swedenstate owns part of all companies; lifelong benefits, high taxes Namibiatraditional; state supports market, foreign investment

24 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

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