Ch 2.1: Economic Systems

Ojectives Describe the characteristics of the traditional, command & market economies. Explain the advantages & disadvantages of the traditional, command & market economies.

economy/ economic system traditional economy command economy Section Key Terms economy/ economic system traditional economy command economy market economy

Economic System An organized way of providing for the wants & needs of a society’s people Fall under 3 main types: Traditional Command Market

Traditional Economies

Definition: Allocation of scarce resources & other economic activity is the result of ritual, habit, or custom Examples: many indigenous peoples around the world (Mbuti, Aborigines, Inuit)

Advantages: Everyone knows which role to play/ little uncertainty exists over WHAT, HOW, and FOR WHOM to produce Disadvantages: 1. Tends to discourage new ideas & new ways of doing things 2. Lack of progress leads to a lower standard of living

Command Economies

Definition: A central authority (government) makes most of the major economic decisions Examples: North Korea, Cuba (currently); China, Soviet Union (past)

Advantages Dramatic change can occur in a short period of time Many health & public services available to everyone at little or no cost

Disadvantages Does not meet the wants of consumers Does not give people the incentive to work hard Requires large decision-making bureaucracy Little flexibility, can’t deal with small, day-to-day changes New & different ideas discouraged, no room for individuality

Market Economies

Definition: People & firms act in their own best interests to answer the WHAT, HOW, and FOR WHOM questions (free enterprise) Examples: United States, Canada, Japan, South Korea, Great Britain, most of Western Europe

Advantages Can adjust to change over time High degree of individual freedom Small degree of government interference Decision-making is not concentrated in the hands of a few Incredible variety of goods & services available to consumers High degree of consumer satisfaction

Disadvantages Does not provide for the basic needs for everyone in society (young, old, disabled, etc) Does not provide enough public services that people value highly Workers & businesses face uncertainty resulting from competition & change Must guard against market failure