Chapter 2 Economic Systems

Key Economic Questions 1.What goods & services are to be produced? 2.How should the goods & services be produced? 3.For whom should the goods & services be produced?

1. What to produce? Each country is like an individual in that their needs & wants are different. A country may depend on resources or money. A country must learn how to best use its resources.

2. How to produce? Depends on how a country wants to use its human resources & capital resources Country has to decide which combo of resources will best suit its circumstances Look at example on p. 18

3. For Whom To Produce? A nation must decide which of its citizens will benefit from the production of goods & services. It must also consider whose needs & wants are the most critical. In some economies, you can buy what you can afford, but in others, those choices are limited because of the country’s answer to the question “What to produce?”

Types of Economic Systems Economic system = nation’s plan for answering the key economic questions No systems operate in a pure form (All are a combination.) 1.Custom-Based Economy 2.Directed (Planned) Economy 3.Market Economy

1. Custom-Based Economy = goods are produced the way they have always been produced Example: Grandfather passes method down to father, who passes it to son, etc. (family business) Usualy in less developed countries Change and growth occur slowly

2. Directed (Planned) Economy = resources are owned & controlled by the government Government decides what & how goods are to be produced & how they will be shared Freedom of the people is limited

3. Market Economy = the three economic questions are answered by individuals through buying and selling activities in the marketplace (any place where buyers and sellers exchange goods, services, and some form of money) Countries with democratic governments Consumers & businesses make economic decisions based on their own interests

Our Economic System Market economy (capitalism) Capitalism = economic resources are usually privately owned by individuals rather than by the government Free/Private Enterprise System = freedom of the individual to choose what to produce Voluntary Exchange = buyers & sellers making their own decisions to determine price & how much to produce

Five Major Features of our Economy 1.Private Enterprise 2.Private Property 3.Profit 4.Competition 5.Freedom of Choice

A. Private Enterprise = right of an individual to choose whether to own a business, what business to enter, & what to produce with only limited government direction Business = an establishment or enterprise that supplies us with goods & services in exchange for payment in some form As a business person, you are free to offer goods & services at times, prices, & places of your choice

B. Private Property = the right to own, use or dispose of things of value You can do whatever you want with it. Businesses have the same right.

C. Profit = money left from sales after subtracting all the costs of operating the business Profit motive = the desire to work hard & be creative to earn higher profit If you don’t work hard & make a profit, you will lose your investment & money

D. Competition = rivalry among businesses to sell their goods & services to buyers Gives the consumer the opportunity to make choices between goods & services If you don’t like a business for some reason, you may choose a competitor Encourages business owners to improve products, offer better services, keep prices reasonable, & produce new things

E. Freedom of Choice You have the right to buy where you want & what you want

Mixed Economic Systems Some combine government ownership & control of basic industries In the United States, some government operated agencies are post offices, schools, city water agencies, etc. => We have modified or mixed capitalism

Emerging Market Economies Some countries see success of market economies & reexamine their own economic system Example: Soviet Union Remember: Your book is old: This section is a little outdated!