2.01 Economic Systems Objective 2.01 Compare different types of economic systems: traditional, free enterprise, command and mixed.

What is Economics? Economics studies how individuals and societies seek to satisfy needs and wants through incentives, choices, and allocation of scarce resources. Economics studies how individuals and societies seek to satisfy needs and wants through incentives, choices, and allocation of scarce resources. Oil & fuel Land Doctors Technology

Factors of Production Economic Resources Economic Resources Natural Resources – raw materials found in nature that are used to produce goods Natural Resources – raw materials found in nature that are used to produce goods Human Resources – people’s knowledge, efforts, and skills used in their work Human Resources – people’s knowledge, efforts, and skills used in their work Capital Resources – used to produce goods and services (buildings, materials, and equipment) Capital Resources – used to produce goods and services (buildings, materials, and equipment) Entrepreneurial Resources - recognize the need for new goods or service Entrepreneurial Resources - recognize the need for new goods or service Scarcity – shortage of resources Scarcity – shortage of resources

Why Economic Systems? Nations use economic systems to determine how to use their limited resources effectively. Nations use economic systems to determine how to use their limited resources effectively. Primary goal of an economic system is to provide people with a minimum standard of living, or quality of life. Primary goal of an economic system is to provide people with a minimum standard of living, or quality of life. Different types of Economic Systems Different types of Economic Systems Traditional Economy Traditional Economy Market Economy (free enterprise) Market Economy (free enterprise) Command Economy Command Economy Mixed Economy Mixed Economy

Traditional Economy Found in rural, under- developed countries– Found in rural, under- developed countries– Vanuatu Vanuatu Pygmies of Congo Pygmies of Congo Eskimos & Indian tribes Eskimos & Indian tribes Belarus Belarus Customs govern the economic decisions that are made Customs govern the economic decisions that are made Farming, hunting and gathering are done the same way as the generation before Farming, hunting and gathering are done the same way as the generation before Economic activities are centered around the family or ethnic unit Men and women are given different economic roles and tasks Advantages: people have specific roles; security in the way things are done Disadvantages: Technology is not used; difficult to improve

Market Economy (Free Enterprise) Also called a Free Market Economy or Free Enterprise Economy Also called a Free Market Economy or Free Enterprise Economy Businesses and consumers decide what they will produce and purchase and in what quantities Businesses and consumers decide what they will produce and purchase and in what quantities Decisions are made according to law of supply & demand Decisions are made according to law of supply & demand Supply and demand of goods and services determine what is produced and the price that will be charged. Advantage—competition to have the best products and services Disadvantage—huge rift between wealthy and poor Note: a true market economy does not exist.

Command Economy The government (or central authority) determines what, how, and for whom goods and services are produced. The government (or central authority) determines what, how, and for whom goods and services are produced. Two types: Two types: Strong Command – where government makes all decisions (communism – China, Cuba) Strong Command – where government makes all decisions (communism – China, Cuba) Moderate Command – where some form of private enterprise exists but the state owns major resources (socialism – France and Sweden) Moderate Command – where some form of private enterprise exists but the state owns major resources (socialism – France and Sweden) Advantages Guarantees equal standard of living for everyone Less crime and poverty Needs are provided for through the government Disadvantages Minimal choices Fewer choices of items No incentive to produce better product or engage in entrepreneurship Also known as a Planned or Managed Economy

Mixed Economy Combination of a market and a command economy Combination of a market and a command economy Government takes of people’s needs Government takes of people’s needs Marketplace takes care of people’s wants. Marketplace takes care of people’s wants. Most nations have a mixed economy: United States, England, Australia Advantage—balance of needs and wants met by government and in marketplace Disadvantage— citizens have to pay taxes

2.02 Supply and Demand Understand Economics and Economic Systems Interpret supply and demand graphs

Marketplace In a free market, consumers determine the demand of a product. In a free market, consumers determine the demand of a product. Entrepreneurs see the demand and make more of the product. Entrepreneurs see the demand and make more of the product. More supply causes the price to decrease as the demand is fulfilled. More supply causes the price to decrease as the demand is fulfilled.

Supply Defined How much of a good or service a producer is willing and able to produce at different prices. How much of a good or service a producer is willing and able to produce at different prices. Supply is produced by the businesses in hopes of making money. Supply is produced by the businesses in hopes of making money.

Demand Defined An individual’s need or desire for a good or service at a given price. Individuals are willing to consume more of product or service at a lower price. When the demand is high, competitors see opportunity in the market.

Supply and Demand Graphs People draw supply and demand graphs so that they can easily see the relationship between the supply and the demand. People draw supply and demand graphs so that they can easily see the relationship between the supply and the demand. A supply and demand graph is a visual representation of supply and demand. A supply and demand graph is a visual representation of supply and demand. The graph shows changes in a product’s demand or supply. The graph shows changes in a product’s demand or supply. The graph can help predict the performance of the product over time. The graph can help predict the performance of the product over time.

When Supply and Demand Meet The point at which the supply and demand curve meet is known as the equilibrium price and quantity. The point at which the supply and demand curve meet is known as the equilibrium price and quantity. When the price is above the equilibrium price, fewer people are willing to buy—the price is too high. When the price is above the equilibrium price, fewer people are willing to buy—the price is too high. When the price is below equilibrium price, many people are willing to buy a lot of the product—the price is too low. Suppliers may not be able to make enough money to cover costs. When the price is below equilibrium price, many people are willing to buy a lot of the product—the price is too low. Suppliers may not be able to make enough money to cover costs.

Equilibrium Price (Market Price) Equilibrium/ Market Price Supply Curve Demand Curve

Prices tell businesses what to produce The prices of goods and services dictate what products are developed, made, improved or modified. The prices of goods and services dictate what products are developed, made, improved or modified. When the price is high, demand falls and businesses produce fewer goods. When the price is high, demand falls and businesses produce fewer goods. When the price is low, demand rises and businesses produce more goods to meet the demand. When the price is low, demand rises and businesses produce more goods to meet the demand.

Competition is sparked Sellers compete to make a profit Sellers compete to make a profit If a person sees that they can meet a need or a want, they enter the marketplace If a person sees that they can meet a need or a want, they enter the marketplace They compete with other businesses already meeting the need or want. They compete with other businesses already meeting the need or want.OR They make a new product and competition follows when others enter the marketplace. They make a new product and competition follows when others enter the marketplace.

The Profit Motive People and businesses enter the marketplace in hopes of making a profit (money). People and businesses enter the marketplace in hopes of making a profit (money). This “profit motive” encourages people to enter the marketplace. This “profit motive” encourages people to enter the marketplace. This hope of making a profit is the reward for people who take risks by entering the marketplace. This hope of making a profit is the reward for people who take risks by entering the marketplace.