1. Chapter 2 Economic Systems
Sections 3 & 4

2. Fundamental of a Market Economy
Market Economies
Fundamental of a Market Economy
KEY CONCEPTS
Private property rights—right to own businesses and resources
Property means material objects, money, intellectual property, labor
Market—place or situation where people buy and sell goods, services

3. Fundamentals of a Market Economy
FEATURE 1: Private Property and Markets
Private property rights must be defined and protected by law
Buyers must be sure sellers have right to sell products they offer
Sellers must be sure they will be paid for their products
FEATURE 2: Limited Government Involvement
Laissez faire—government should not interfere in economy
Capitalism—system having private ownership of factors of production
— says producers will create products consumers demand
Actual market economies all have some government involvement
FEATURE 3: Voluntary Exchange in Markets
Voluntary exchange—traders believe they get more than they give up
In market economy, most trade is exchange of product for money
Profit—financial gain from business transaction

4. Fundamentals of a Market Economy
FEATURE 4: Competition and Consumer Sovereignty
Competition—sellers’ efforts to get business by offering best deal
Consumer sovereignty—buyers choose products, control what is produced
Competition controls self-interested behavior
sellers offer low price or high value to please consumers, make profit
FEATURE 5: Specialization and Markets
Specialization
people concentrate their efforts in the activities they do best
encourages efficient use of resourced
leads to higher-quality, lower-priced products

5. Circular Flow in Market Economies
KEY CONCEPTS
Circular flow model illustrates how interactions occur in a market
Represents the two key decision makers: households, businesses
Shows the two markets where households and businesses meet
goods and services
resources

6. Circular Flow in Market Economies
Product Markets
Product market—market where goods and services bought and sold
includes all purchases by individuals from businesses
Factor Markets
Factor market—market for the factors of production
land, labor, capital, entrepreneurship
Individuals own all factors of production
own some outright, such as labor; some indirectly, such as stocks
individuals are producers; businesses are customers
Circular Flow
Circular flow model shows how market economies operate
outside arrow shows flow of money
inside arrow shows flow of resources and products

7. Circular Flow in Market Economies
KEY CONCEPTS
Late 1940s to early 1990s, many countries had command systems
U.S.S.R., Eastern Europe, China, much of SE Asia, Cuba, North Korea
Most of these countries have now adopted market systems
remaining communist countries using some market measures

8. Impact of Market Economies
Advantages
Individuals free to make economic choices, pursue own work interests
Less government control means political freedom, less bureaucracy
Locally made decisions mean better use of resources, productivity
Profit motive ensures resources used efficiently, rewards hard work
— resulting competition leads to higher-quality, more diverse products
Disadvantages
Pure market economy has no way to provide public goods and services
Does not give security to sick or aged
During U.S. industrial boom, business owners rich, workers low pay
Businesses did not address problems caused by industrialization
Industrialized societies adopt some government control of economy

9. Modern Economies in a Global Age
Section-4
Today’s Mixed Economies
KEY CONCEPTS
Mixed economy has elements of traditional, command, market systems
most common type of economic system
Traditional, command, market economies adopt elements from others

10. Today’s Mixed Economies
Life in a Mixed Economy
Family farming in U.S. serves as example of mixed economy
traditional: all members of family help bring in harvest
command: affected by government—public school, roads, Social Security
market: own land, sell their products in competitive market

11. Today’s Mixed Economies
Types of Mixed Economies
Most economies emphasize one type; U.S. basically has market system
Many European countries greater mix of market and command elements
France—government controls some industries; provides social services
Sweden—state owns part of all companies; lifelong benefits, high taxes
Namibia—traditional; state supports market, foreign investment

12. Trends in Modern Economies
KEY CONCEPTS
Economies change in response to natural, social, political changes
East European economies changed after fall of communism

13. Trends in Modern Economies
TREND 1: Changes in Ownership
Economies in transition often go through changes in ownership
To nationalize is to change from private to government ownership
To privatize is to change from government to private ownership Ties
TREND 2: Increasing Global
Growth of global economy—economic actions across national boundaries
recent agreements open up world markets to trade among countries
fast, safe, cheap transport of resources, products eases distribution
phone, computer links make financial transactions quick, inexpensive
cross-border business partnerships lower research, production costs