2.01 Economic Systems Objective 2.01 Compare different types of economic systems: traditional, free enterprise, command and mixed.

What is Economics? Economics studies how individuals and societies seek to satisfy needs and wants through incentives, choices, and allocation of scarce resources. Economics studies how individuals and societies seek to satisfy needs and wants through incentives, choices, and allocation of scarce resources. Oil & fuel Land Doctors Technology

Factors of Production Economic Resources Economic Resources Natural Resources – raw materials found in nature that are used to produce goods Natural Resources – raw materials found in nature that are used to produce goods Human Resources – people’s knowledge, efforts, and skills used in their work Human Resources – people’s knowledge, efforts, and skills used in their work Capital Resources – used to produce goods and services (buildings, materials, and equipment) Capital Resources – used to produce goods and services (buildings, materials, and equipment) Entrepreneurial Resources - recognize the need for new goods or service Entrepreneurial Resources - recognize the need for new goods or service Scarcity – shortage of resources Scarcity – shortage of resources

Why Economic Systems? Nations use economic systems to determine how to use their limited resources effectively. Nations use economic systems to determine how to use their limited resources effectively. Primary goal of an economic system is to provide people with a minimum standard of living, or quality of life. Primary goal of an economic system is to provide people with a minimum standard of living, or quality of life. Different types of Economic Systems Different types of Economic Systems Traditional Economy Traditional Economy Market Economy (free enterprise) Market Economy (free enterprise) Command Economy Command Economy Mixed Economy Mixed Economy

Traditional Economy Type of economy where people believe in doing things the same as they have always been done in the past Type of economy where people believe in doing things the same as they have always been done in the past

Traditional Economy Customs govern the economic decisions that are made Customs govern the economic decisions that are made No official govt. role- families or ethnic traditions are the law No official govt. role- families or ethnic traditions are the law Economy is motivated by people wanting to do what past generations have done Economy is motivated by people wanting to do what past generations have done Resources are divided by what the past or elders have done Very low level of competition in economy Found in rural, under- developed countries– Vanuatu Pygmies of Congo Eskimos & Indian tribes Belarus Amish

Traditional Economy Advantages & Disadvantages Advantages: people have specific roles; security in the way things are done Advantages: people have specific roles; security in the way things are done Disadvantages: Technology is not used; difficult for people to improve Disadvantages: Technology is not used; difficult for people to improve

Market Economy Also called a Free Market Economy or Free Enterprise Economy Also called a Free Market Economy or Free Enterprise Economy Businesses and consumers decide what they will produce & purchase and in what quantities Businesses and consumers decide what they will produce & purchase and in what quantities Decisions are made according to law of supply & demand Decisions are made according to law of supply & demand

Market Economy Businesses & consumers make economic decisions Businesses & consumers make economic decisions No government role- run by an invisible hand No government role- run by an invisible hand Economy is motivated by supply & demand in market Economy is motivated by supply & demand in market Resources given to the one who pays the given price set by the market’s demand Competition is very HIGH Does not exist in formal society

Market Economy Advantages & Disadvantages Advantage—competition to have the best products and services Advantage—competition to have the best products and services Disadvantage—huge rift between wealthy and poor Disadvantage—huge rift between wealthy and poor Note: a true market economy does not exist Note: a true market economy does not exist

Command Economy Economic system that is run by a central government or authority Economic system that is run by a central government or authority

Command Economy Centralized government makes economic decisions Centralized government makes economic decisions Government makes all the decisions Government makes all the decisions Government motivates the economy Government motivates the economy Government dictates which resources will be used; when & where Competition is LOW Countries with this type of economy: China, Cuba, Sweden, & France

Command Economy Advantages & Disadvantages Advantages Advantages Guarantees equal standard of living for everyone Guarantees equal standard of living for everyone Less crime and poverty Less crime and poverty Needs are provided for through the government Needs are provided for through the government Disadvantages Disadvantages Minimal choices Minimal choices Unavailability of items Unavailability of items No incentive to produce better product or engage in entrepreneurship No incentive to produce better product or engage in entrepreneurship

Mixed Economy Combination of a market and a command economy Combination of a market and a command economy

Mixed Economy Economic decisions made by both market & government Economic decisions made by both market & government Government takes care of people’s needs (roads, schools, military) Government takes care of people’s needs (roads, schools, military) Marketplace (buyers/sellers) motivates economy Marketplace (buyers/sellers) motivates economy Resources allocated by government & the market Competition=HIGH Countries with this type of economy: United States, England, Australia

Mixed Economy Advantages & Disadvantages Advantage Advantage balance of needs and wants met by government and marketplace balance of needs and wants met by government and marketplace Disadvantages Disadvantages citizens have to pay taxes citizens have to pay taxes different classes in society different classes in society

Socialist Economy Characterized by more government ownership & central planning. Characterized by more government ownership & central planning. Government, which relies on tax revenues, is far less likely than private businesses to heed price signals or to feel the discipline imposed by market forces. Government, which relies on tax revenues, is far less likely than private businesses to heed price signals or to feel the discipline imposed by market forces.