1. Chapter 2
Economic Systems

2. Types of Economic Systems
how society uses resources to satisfy people’s wants
Three basic systems:
Traditional
Command
market economies

3. Types of Economic Systems
Traditional Economy
centers on families, clans, or tribes
decisions are based on customs and beliefs
Good of the group always comes before individual desires

4. Characteristics of Traditional Economies
Advantages and Disadvantages
Advantages: little disagreement over goals, roles
methods of production, distribution determined by custom
Disadvantages: as result of resistance to change, less productive
do not use new methods; people not in jobs they are best suited for
low productivity results in low standard of living

5. Types of Economic Systems cont.
Command Economy
(centrally planned economy) government makes economic decisions
determines what to produce; how to produce; who gets products
determines who is employed, work hours, pay scales
Wants of individual consumers rarely considered
Government owns means of production: resources and factories

6. Government Controls EXAMPLE: Socialism and Communism
Karl Marx influenced some societies to adopt command economies
socialism—government owns some of the factors of production
communism—no private property; little political freedom
Authoritarian system requires total obedience to government
communism is authoritarian socialism

7. Karl Marx: Economic Revolutionary
A New View of Economics
Marx lived during Industrial Revolution
Argued factory owners used workers as resource
exploited workers by keeping wages low to increase profits
workers would rebel, establish classless society
Wrote The Communist Manifesto (with Friedrich Engels), Das Kapital

8. Government Controls Socialism and Communism
Democratic socialism established under democratic political process
government owns basic industries
other industries private
central planners make decisions for government-owned industries
central planners might control other sectors, such as health care

9. Command Economies Today
No pure command economies today
modern telecommunications bringing about change
Some economies still have mostly command elements

10. Command Economies Today
North Korea
Communist North Korea used resources for military, not necessities
built large army; nuclear weapons program
In 1990s and early 2000s, millions died of hunger, malnutrition
In 1990s, production decreased and economy shrank
Since 2003, some market activity allowed

11. Command Economies Today
Impact of Command Economies
In theory, command systems fair to everyone; In practice, many disadvantages
central planners do not understand local conditions
workers have little motivation to be productive or conserve resources
artificially low prices lead to shortages
people sacrificed to carry out centrally planned policies

12. Types of Economic Systems cont.
Market Economy
driven by choices of consumers and producers
consumers spend money, go into business, sell their labor as they wish
producers decide how to use their resources to make the most money
Consumers, producers benefit each other when they act in self-interest

13. Fundamentals of a Market Economy
1: Private Property and Markets
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

14. Fundamentals of a Market Economy
3: Voluntary Exchange in Markets
Voluntary exchange—traders believe they get more than they give up
4: Competition and Consumer Sovereignty
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

15. Fundamentals of a Market Economy
5: Specialization and Markets
Specialization—people concentrate their efforts in the activities they do best
encourages efficient use of resources
leads to higher-quality, lower-priced products

16. 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

17. Circular Flow in Market Economies
Factor Markets
Factor market—market for the factors of production
land, labor, capital, entrepreneurship
Product Markets
Product market—market where goods and services bought and sold
includes all purchases by individuals from businesses
Circular flow model shows how market economies operate

18. Teal- flow of resources and products
Green- Flow of $$

19. Impact of Market Economies
Advantages
Individuals free to make economic choices, pursue own work interests
Less government control means political freedom
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

20. Impact of Market Economies
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

21. Today’s Mixed Economies
Mixed economy
has elements of traditional, command, market systems
most common type of economic system
Traditional, command, market economies adopt elements from others

22. 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

23. Today’s Mixed Economies
Types of Mixed Economies
U.S. basically has market system
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

24. Trends in Modern Economies
Changes in Ownership
Nationalize is to change from private to government ownership
Privatize is to change from government to private ownership