1. Economic Systems and Decision Making
Chapter 2
Economic Systems and Decision Making
How do economic systems help society deal with the fundamental economic problem of scarcity?

2. There are 3 main types of economies.
Traditional
Command
Market

3. Traditional Economy:
Economic activity based on ritual, habit, & custom.
a. Strengths:
1. everyone knows their role & life
is stable & predictable
2. Little uncertainty over the what,
how, & for whom questions
b. Weaknesses:
1. discourages new ideas
2. lack of progress leads to lower standard of living.

4. Amazon Shaman

5. Tanzanian Hunters/Farmers

6. Face Painting – Papua New Guinea

7. Command Economy:
Central authority makes most economic decisions. The government answers WHAT, HOW, and FOR WHOM.
a. Strengths:
1. Can change direction drastically in short time.
B. Weaknesses:
1. Not designed to meet needs & wants of individuals.
2. large bureaucracy for economic planning
3. Not flexible in dealing with
everyday issues
4. Stifles new ideas

8. Former USSR

10. Soviet Peasants on a collective farm
Soviet Peasants on a collective farm. Without the freedom of choice, Bill Gates might have been a farmer.

11. Socialism
An economic and political system where the government owns some, but NOT all the factors of production. This could be classified as a form of Command Economy.

12. Market Economy:
Market - People & firms act in own best interest in search of profits to answer the economic questions WHAT, HOW, and FOR WHOM.
A. Strengths:
1. Markets can adjust over time
2. Relatively small government interference
3. decentralized decision making
4. High variety/quality of products
5. High consumer satisfaction

13. B. Weaknesses:
1. Main one is deciding for whom to produce
2. The young, sick, & old have difficult time in pure market system.
3. Markets sometimes fail
- Competition (or lack thereof)
- resource mobility
- availability of information
Capitalism – An economic system where private citizens own the factors of production.

14. As communist countries and socialist countries collapse, they have attempted to transition towards capitalism. This can be seen through many Eastern European countries that were once part of the Soviet Union. These include Hungary, Sweden, Czechoslavakia (now Slavakia and Czech Republic), and Poland.
Privatization – Government property converted to private property.

15. Unfortunately these transitions are not always easy
Unfortunately these transitions are not always easy. Often there are power vacuums that take advantage of Black Markets to profit and obtain power.
Black Market – Illegal sale of goods and services through unregulated markets.

16. Communism
According to Karl Marx (the founder of communism), the ideal economy would divide all property equally amongst its citizens. All citizens would contribute and benefit according to their needs. In essence, a government would no longer be needed.

17. Mixed Economy
When an economy is a combination of either tradional, market, or command economies.

18. Stop and discuss these questions with your neighbors.
How much involvement should the government have?
Should the government be responsible for providing access to healthcare, or should we only have the option to finding it on our own?
What happens if the government no longer regulates industry, and does not collect enough revenue to function properly?

19. GDP and GDP per Capita
GDP is how we measure economic growth. It is based on the dollar value of goods sold in an economy.
GDP per capita is based on how we divide that economic growth per person.

20. GDP per Capita in the US
In the U.S. we have typically seen a GDP per capita rate increase.

21. GDP per capita growth rate in India
While GDP in India is expanding rapidly, GDP per capita is going down. Why is this phenomina occurring?

24. As of 2007