Economic Systems Chapter 2 – Sections 1 & 2

Economy Economy = an organized way of providing for the wants and needs of a nation’s people Three types: Traditional Command Market Economy

Traditional Economy Traditional economy = the allocation of scarce resources comes from ritual, habit, or customs People not free to make decisions on what they want Examples: Eskimos of Canada Aborigines of Australia

Command Economy Command Economy = economy in which the government makes decisions on what is produced, how it is produced and for whom The people have very little influence Also called socialist Examples: North Korea Cuba Former Soviet Union

Advantages: It can change direction in a short time Example: Soviet Union went from being a rural agricultural society to a heavy industrial society Health and public services are available to everyone

Disadvantages: Doesn’t meet wants of consumers Doesn’t give people motivation to work hard Requires a large bureaucracy to keep it running People with new ideas can’t get them created

Market Economy Market economy = a system where goods and services are sold on a free market to consumers for a profit with little government interference Also called capitalism US, Japan, Germany, etc

Advantages: Over time it can adjust to changing wants Has a high degree of individual freedom Very little government interference Decision making is decentralized – in the hands of billions Huge variety of goods and services available High degree of consumer satisfaction

Disadvantages: Doesn’t provide for the basic needs of all the people Doesn’t provide enough of the services that people value highly (education, defense, etc) High degree of uncertainty of workers if they will keep their jobs

Market economy can fail if three conditions are not met: Markets must be competitive Resources must be free to move Consumers need access to info to make wise decisions

"The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.“ ~ Winston Churchill

Competition & Free Enterprise Free Enterprise = competition is allowed to flourish with little government interference Another way to describe America’s economy Five characteristics: 1) Economic freedom 2) Voluntary exchange 3) Private property rights 4) Profit motive 5) competition

1) Economic freedom: 2) Voluntary Exchange: Freedom to choose occupation Can work for yourself or someone else Work anywhere or anytime 2) Voluntary Exchange: The act of buyers and sellers freely engaging in transactions Both buyer and seller get something

3) Private Property Rights: people to own &control their possessions as they wish Tangible property: cars, houses Intangible Property: skills and talents Gives a person motivation to work, save, and invest

4) Profit Motive: 5) Competition: The driving force that encourages people and businesses to improve their well being People are free to risk their wealth on a business If it does well, they make a profit 5) Competition: The struggle among sellers to attract consumers while lowering costs

The Role of the Entrepreneur Entrepreneurs organize and manage land, capital, and labor to make a profit Want to be their own boss and are willing to risk everything If he is successful: workers get better jobs consumers get better products gov’t gets more taxes

The Role of the Consumer Consumers are the driving force behind production If they don’t like a product, a business will fail, if they like it a business will prosper Consumer wants change frequently

The Role of Government The government plays several roles in the economy: 1) protector: Laws against unsafe food and cars Laws against discrimination in workplace 2) provider and consumer Gov’t supplies defense, education, public services Gov’t also consumes many products

3) regulator: Federal gov’t regulates commerce, communication, banking State gov’t regulates insurance rates Local gov’t regulates zoning permits Most businesses don’t like to be told what to do However, this helps protect the consumer

4) promoter of national goals Gov’t functions change the system to achieve freedom, efficiency, security, full employment, etc. The US is said to have a mixed economy – one where people buy and sell freely, but are subject to some government regulation