Economic Systems Chapter 2

Section 1: Economic System Method used by a society to produce and distribute goods and services.

Three Key Economic Questions: What good and services should be produced? How should these goods and services be produced? Who consumes the good and services?

Economic Goals Economic Efficiency Economic Freedom Making the most of resources Economic Freedom Freedom from government intervention in the production and distribution of goods and services.

Economic Security and Predictability Assurance goods and services will be available, payments will be made on time, and a safety net will protect individuals in times of economic disaster. Economic Equity Fair Distribution of Wealth

Economic Growth and Innovation Innovation leads to economic growth, and economic growth leads to a higher standard of living. Other Goals Societies pursue additional goals.

The Four Economic Systems

1.) Traditional Economy Relies on habit, custom, or ritual to decide questions of production and consumption of goods and services.

2.) Market Economy (Free Market, Capitalism) Decisions on production are consumption of goods and services are based on voluntary exchange in markets.

3.) Centrally Planned Economy (Command) Central Government makes all decisions on the production and consumption of goods and services.

4.) Mixed Economy Combines traditional and the free market with limited government involvement.

Section 2 Market Specialization Arrangement allowing buyers and sellers to exchange things Specialization The concentration of the production efforts of individuals and firms on a limited number of activities.

Free Market Economy Based on voluntary exchange Individuals and businesses own the factors of production, make what they want and buy what they want.

Circular Flow of the Economy Household Person or groups of people living in the same residence. Firm Organization using resources to produce a product which it then sells.

Factor Market Product Market Market in which firms purchase the factors of production from households Product Market Households purchased the goods and services produced by firms.

Adam Smith – The Wealth of Nations Invisible Hand Describes the self regulating nature of the market place.

Self-Interest Incentive One’s own personal gain. Expectation encourage people to behave in a certain way.

Competition Laissez Fair Struggle among producers for the dollars of the consumer Laissez Fair Belief that the government should not intervene in the market place.

Advantages of the Free Market System Economic Efficiency Producers make what consumers want, when they want it, and generally at the price they are willing to pay Economic Freedom

Economic Growth Consumer Sovereignty Competition encourages innovation Consumers decide what is produced

Section 3 Centrally Planned Economy Authoritarian Socialism Requiring strict obedience to an authority, such as a dictator Socialism Economic system which evenly distributes wealth through society

Communism Political system with a centrally planned economy in which all decisions are made by the central government Karl Marx Wrote the Communist Manifesto

Mixed Economies Public Goods and Services Welfare Cash Transfers Goods and services paid for and shared by society, which would be too expensive for the individual Welfare Government Aid to the Poor Cash Transfers Direct payment of money to the eligible poor

What is Welfare?

Causation and Correlation One event causes the other Correlation Two events are linked or connected in some way

Average Families on Welfare Median Real Welfare Benefit for Family of 3 (Adjusted for Inflation) Families Receiving Welfare 1970 817 1909 1975 752 3357 1980 601 3642 1985 531 3692 1990 480 3974 1995 426 4879 2000 421 2256

A 2012 USDA report on the program says that, in fiscal year 2011, SNAP provided on average $134 per person to 44.7 million individuals in 21.1 million households each month. 

Access to healthy food is a fundamental building block for a productive life. While federal food assistance benefits are critical to enabling low-income families to buy food, the lack of access to healthy, fresh food results in poor health outcomes and increases the risk of diet-related chronic illness. Nationwide, there are more than 46 million recipients of Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps) benefits receiving over $65 billion in federal food assistance. In Michigan, there are 1.9 million SNAP recipients, over 19% of the state’s population and considerably higher than the 12.9% national average. In Michigan, SNAP benefits are administered via Electronic Benefits Transfer (EBT) on the Michigan Bridge Card.

Externality Economic side effect if a good or service generating benefits or costs to someone other than the person deciding how much to produce or consume