Chapter 1: Economic Systems Intro to Business Chapter 1: Economic Systems

Three Economic Questions What goods and services will be produced? What do we have? How will they be produced? Hand > machine > elsewhere Who gets the stuff?

3 Economic Systems Economic system (economy) – an organized way of providing for the wants and needs of people. 1). Command 2). Market 3). Traditional

Command Economies Economic activity is planned out by the government, with people having little influence. Central Authority controls all economic decisions Examples: Cuba North Korea Former Soviet Union

Command Economies - Pros Allows an economy to change direction very quickly. Under Stalin, Russia moved from a rural agricultural economy to an industrial economy.

Command Economies - Pros Little uncertainty as to who will do what. No unemployment because the government gives everyone a job (whether it is needed or not).

Command Economies - Cons Not designed to meet the wants of consumers. Provides strange incentives Do just enough to meet quotas.

Command Economies – More Cons No rewards for individual performance. No flexibility to handle problems. Requires a large decision making agency.

Market Economies People and businesses act in their own best interests to answer the three basic economic questions. Marketplace has control over the economic decisions

Market Economies – How they work Lure of personal and financial gain leads consumers and businesses to interact in various markets. Each person acts as they see fit in order to advance their own interests.

Market Economies - Pros Economy can adjust to change over time Businesses can adapt to changing consumer tastes by creating new/different products. High degree of individual freedom Businesses and individuals are free to do what they want.

Market Economies – More Pros Small degree of government interference (Mixed Economy) Economic decisions are made by all, not limited to government officials. Seemingly unlimited variety of goods and services available to consumers.

Market Economies - Cons Does not provide for the basic needs of everyone. Elderly, disabled and other groups would be unable to survive in a market economy without governmental assistance.

Market Economies – More Cons Does not provide certain services that people value. National Defense & Education. High degree of uncertainty Tommy Boy Jobs going overseas Market Failures

Mixed Economies Both market forces and government decisions determine which goods are services are produced and distributed Government doesn’t directly influence private sector to produce goods Government influence in the form of taxes, national defense, public education, etc.

Traditional Economies Economic activity is based on tradition with roles determined by previous generations. Customs and tranditions Examples: Medieval Europe Various hunting tribes in Africa and northern Canada

Inuits in the Artic Circle Bhutan, Africa Main concern is survival Barter for the exchange of excess goods Produce items necessary for survival Tools for hunting Tools for shelter Inuits in the Artic Circle Bhutan, Africa

Traditional Economies – Pros Everyone knows what their role is. Life is generally predictable and stable. Little to no financial problems Little drain on natural resources Sense of community and security

Traditional Economies - Cons Discourages new ideas and new ways of doing things. Lack of progress leads to a lower standard of living. No economic growth Little change to take advantage of modern technology No social mobility

The US Economic System Mixed Economy Capitalism Based on 4 important principles Private Property Freedom of choice Profit Competition