1. Economic Systems
Chapter 2

2. Section 1
Economic System- the way society uses its scarce resources to satisfy unlimited wants
Three systems- Traditional, Command, Market Economies

3. Traditional Economy
System where societies make economic decisions based on family, tribe, or clan customs and beliefs.
Men and Women have set roles
Men- hunt and herd animals
Women- farm and take care of kids

4. What do you think the advantages and disadvantages of this type of system may be?

5. Advantages and Disadvantages of Traditional Economy
Advantage- answers the three essential economic questions, What- enough to survive, How- follows tradition, For Whom- divided up through tradition
Disadvantage- Systems are not changed, leads to less productivity. People are born into their role, lower standard of living

6. Command Economy Gov’t decides what, how, and for whom to produce.
Gov’t decides how to satisfy wants and needs of the consumer
Basically, they control all aspects of economy

7. Market Economy
Individuals choice decides what, how, and for whom to produce.
Consumer and producer drive this economy

8. Roles of Consumers and Producers in Market Economies
Consumer- spend money as they wish, enter into business with who they want, and buy work and services of others
Producers- Decide what goods and services to sell and use limited resources to make as much money as possible

9. Individuals in a market economy act in their own self interest when making economic decisions
Producers make goods and services to make as much profit as possible

10. Adam Smith’s Invisible Hand Theory
When you make an economic decision you are acting in your own, best self interest, but at the same time you are unknowingly helping someone out.

11. Section 2- Command Economics
Gov’t decides what and how a good or service should be produced
They determine wages, economic roles, and they make all decisions.
They even tell you who can operate a business and how much they can sell a month

12. Socialism and Communism
These political systems are the best ex. of command economies
Both were influenced by the historian and economist Karl Marx

13. Karl Marx
He believed the worker would overthrow the rich overtime and transfer the ownership of land and industry to the people.
He believed that this would create a classless society.

14. Marx and Engels
Both Marx and Friedrich Engels laid out their economic philosophy in their book Communist Manifesto, in 1848
Marx wrote Das Kapital in 1867 to display his philosophy further.
Marx’s theories do not work! He was trying to create a Utopian Society

15. Socialism and Communism
Socialism- economic system where the gov’t owns some or all of the factors of production, small business is individually owned
Democratic Socialism- gov’t is put in place by the people, gov’t owns basic industries, but some are privately owned. Ex. Most European Nations

16. Communism- extreme form of socialism
Communism- extreme form of socialism. Gov’t owns all factors of production, economy is controlled by communist party, and has absolute authority. Ex North Korea

17. Advantages and Disadvantages
Provide for sick and elderly
Disadvantages- Central gov’t does not understand “local” problems
No private property, leads to lack of motivation to use resources wisely
Prices are set, leads to shortages
No individual rights

18. Section 3- Market Economies
Market Economies revolve around people making decisions in their own self interest
Private Property Rights and ownership enable this
Private Property Rights- rights to groups and individuals who own property
Ex. Factories, offices, clothes, music

19. Markets
Any place or situation where people have the right to buy and sell as they please, allows the enhancement of their own self interest.
Markets can only work if we have well defined property rights
Ex. Title to a car, copyrights, even receipts

20. Without such property rights and laws the buyer could not trust the seller

21. Market Economies Include Limited Gov’t Involvement
All four factors of production are privately owned. Capitalism
Most Economies including ours, has limited gov’t involvement
Purest of capitalism is laissez faire, no gov’t involvement in the market place
It does not exist in the real world

22. Voluntary Exchange in Markets
This is where both buyer and seller believe the worth of trade outweighs what they are giving up
Ex. Car salesman and buyer, dealership makes profit

23. Competition and Consumer Sovereignty
Competition creates quality of goods and services and competitive prices
Consumer Sovereignty- Consumers have ultimate control over what is produced, because they are free to buy what they want and reject what they don’t want
What would happen if we did not have competition between sellers?

24. Specialization and Markets
We tend to specialize our time and effort into a job we can do best
In turn, we take our wages to support our lifestyle
This allows people to trade money for more efficiently made goods and services
Ex. Teacher vs. Farmer
Refer to Circular Flow Model

25. Product Market Market for goods and services
Household buys goods and services businesses sell, then they take their revenue to pay to keep their business going.

26. Four Factors Market
Businesses purchase the four factors(land, labor, capital, entrepreneurship) they need to sell goods and services
In this market businesses are the buyers and households are the sellers.

28. Advantages and Disadvantages of Market Economy
Economic and political freedom
Ability to make as much profit as possible
Disadvantages-
They only invest in profit
No military or social service spending
Unable to work=no help Just rich and poor wage gap

29. Section 4- Mixed Economies
Most nations are a mix of traditional, command, and market economies
Ex. U.S., gov’t protects consumers and regulates some areas of business
Even command economies have mixed elements ex. China

30. U.S. is more of a market system, contains private ownership and markets
European nations economies are more mixed than ours
European nations own key parts of their industry and in turn provide free healthcare and social assistance

31. Fall of Communism=Free Markets in Eastern Europe
Eastern Europe use to be under communist rule and Soviet influence
Early 90’s Soviet Empire falls and eastern European nations begin to use market economics slowly

32. Two Trends In Moving Towards Mixed Economy
1. Changes in Ownership-
These nations use to nationalize industry, gov’t owned and operated
Now these former command economies have moved toward privatization- individually owned by a person or group.
This creates more efficiency and motivation to use resources wisely

33. Why would a private business have more incentive to be more efficient and more productive compared to a business in a command economy?

34. 2. Increasing Global Ties
Globalization or Global Economy- opening your market and other to foreign investment
Ex. U.S. and China

35. Reasons for Globalized Economies
Nations are investing in each other’s markets, stocks, bonds, etc. due to better telecommunications (internet and world wide web).
Technological advancements in transportation of goods