Economic Systems Traditional Based on agriculture  Limited barter trade  Neolithic Civilizations  Early River Valley Civilizations Market Based upon Supply and Demand  Usually focus on consumer goods  Little government control Command Controlled by strong, centralized gov’t  Usually focuses on industrial goods  Little attention paid to agriculture and consumer goods Mixed Combination of Market and Command economic systems  Market forces control most consumer goods  Government directs industry in need areas.

Market Economy Market: any arrangement that allows buyers and sellers to exchange things –None of us produce all we need to satisfy our needs and wants

What are the characteristics of a free market economy? Free Market Economy Voluntary exchanges take place in markets Needed because no one is self-sufficient

I’m special… so special… Each of us specializes in a few products or services –Specialization: the concentration of the productive efforts of individuals/businesses on a limited number of activities –Baker – breads, cakes, cookies –Nurse – taking care of the sick Leads to efficient use of land, labor, & capital –one task instead of all  work is done more efficiently, saving resources/avoiding waste

Efficiency Because resources are always scarce, societies try to maximize what they can produce using the resources they have –If a society can accurately assess what its people need and want, it increases its economic efficiency

Self-Interest The Wealth of Nations by Adam Smith – described how markets function Buyer and seller consider only their self- interest (their own personal gain) –Self-interest is the motivating force in the free market – the push that leads people to act

It’s Free!!! Free Market Economy: economic system in which decisions on the 3 key economic questions are based on voluntary (freedom of choice) exchange in markets –Individuals/businesses make their own decisions about what to buy/sell –Individuals/privately owned businesses own the factors of production, make what they want, & buy what they want

Households: a person or group of people living in a single residence –Own the factors of production –Hired by firms as workers –Purchase products from firms Product market: the arena of exchange in which households purchase goods and services from firms

Competition Competition: the struggle among producers for the dollars of consumers Incentive: the hope of reward or fear of penalty that encourages a person to behave in a certain way

The Invisible Hand Self-interest and competition work together to regulate the marketplace Self-interest allows consumers to purchase certain goods/services, and firms to produce them + Competition causes firms to produce more, and moderates the desire to raise price ================================ Consumers get the products they want at prices that reflect the cost of producing them The Invisible Hand: a term by Adam Smith to describe the self-regulating nature of the marketplace (Laissez Faire)

What are the characteristics of a free market economy? Voluntary exchanges take place in markets Needed because no one is self-sufficient Participants: Households and Firms Free Market Economy Regulated by Self-interest Competition Advantages: Efficiency, Freedom, Growth, Variety of Goods and Services

Traditional Economy Economic System that relies on habit, custom, or ritual to decide the three key economic questions –Usually found in communities that are relatively small and close –Economically successful if they meet their own needs Tend to be slow to adopt new ideas/technology Lack modern conveniences/low standard of living

Command Economy Communism Centrally Planned Economy: an economic system in which the government, rather than individuals, makes all decisions on the three key economic questions (What is produced? How much is produced? Who is going to buy it?) –Gov’t owns both land and capital, and labor too, because it controls where people work and what they are paid

I Command You!!! Command economy: another name for a centrally planned economy –Opposes : Private property Free market pricing Competition Consumer choice

Spread the wealth Socialism: an economic and political system based on the belief that wealth should be distributed evenly throughout a society –Economic equality can only exist if economic power is controlled by the government, rather than by individuals or corporations

All or nothing… Communism: a political system in which the central government owns and controls all resources and means of production, and makes all economic decisions –Conflict between labor and capital: labor is the source of all value –Anti-capitalism – all the profit created by the labor of the workers ended up in the hands of the owners = exploitation of workers and unequal distribution of wealth

What are the characteristics of a centrally planned economy? Features Government owns all factors of production Government makes all the decisions Bureaucrats make detailed plans No consumer sovereignty Disadvantages Results in poor quality goods, shortages, and falling production Does not achieve equality Efficiency suffers Allows no freedom of choice