Economic Systems and Economic Factors

Market Economy Economic system in which supply, demand, and prices help people make decisions Is a participatory economy Choices you make and things you buy influence the producer Also affects the prices

Consumer Sovereignty Consumer is “King”—determines what products will be produced The consumer is important because businesses usually try to produce the products that people want most.

Capitalism Private citizens own most, if not all, of the means of production.

Free Enterprise and Laissez-faire Free Enterprise: allowing businesses to compete for profit with minimum amount of gov’t interference Laissez-faire: gov’t should stay out of all factors of business

Wealth of Nations Book written by economist Adam Smith Claimed that the “invisible hand” of the market would guide people to act in the public interest by following their own self-interest. They would use the hand as a guide to help them use resources efficiently and achieve the maximum good for society.

Profit Motive The driving force that encourages individuals and organizations to improve their material well-being.

Private Property We have the ability to own or use, or dispose of our own property as we choose as long as we do not interfere with the lives of others. Gives us the incentive to work, save, and invest. We will take better care of things if we actually own them

Command Economy Major economic decisions are made by the central government Individual has little, if any, influence over economy A.K.A controlled economy Tend to be very inefficient Grow very slowly Ex: Cuba and North Korea

Socialism Early 1800’s people believed that to help exploited workers capitalism must be eliminated They advocated socialism—the belief that the means of production should be owned and controlled by society either directly or through the government. Wealth would be distributed equally among the citizens.

Karl Marx German socialist who supported violent revolution Wrote the Communist Manifesto: believed that in time socialism would develop into full communism Under communism one class would evolve, property would be held in common

Communism Land and capital are owned by the government not private citizens Government decides what to produce, how to produce the goods, and for whom to produce the goods for. Fixes the wages of all workers and sets prices.

Mixed Economy Combines basic elements of a pure market economy and a command economy Most countries have a mixed economy Private ownership of property and individual decision making are combined with government intervention and regulations.

Keynesian Theory Promotes a mixed economy where the state and private sectors play a role in the economy. Developed by John M. Keynes

Fiscal Policy Changes in government spending or tax policies Sometimes government increases spending and buys more goods and services itself—thus promoting hiring in businesses The government might cut taxes, hoping that with more money people will buy more

Traditional Economy Economic decisions for What, How, and for Whom to produce are based on custom or habit Things are done, “The way they have always been done” If your grandparents and parents fished for a living you will then fish for a living Most developing (poor) countries will have this as their economy

Exchange Rate What the price of your nation’s currency is in terms of another nation’s currency Helps to measure one economy against another Under this system supply and demand set the prices of various currencies They change daily