Economic Systems CH 2.1 pg. 33-39

The survival of any society depends on its ability to provide food, clothing and shelter for its people. Because these societies face scarcity, decisions concerning WHAT, HOW, and FOR WHOM to produce must be made. Economic System: an organized way that a society provides for the wants and needs of their people. 3 major economic systems exist: TRADITIONAL, COMMAND, and MARKET (What are some examples of each?)

Traditional Economies Traditional Economy: the allocation of scarce resources and nearly all other economic activity, stems from ritual, habit, or custom. Your role in society is defined by your ancestors. What are some advantages and disadvantages? Advantage: everyone knows their role in society. Disadvantage: discourages new ideas and people have a lower standard of living.

Command Economies Command Economies: one in which a central authority makes most of the WHAT, HOW, and FOR WHOM decisions. What are some examples of command economies? North Korea, Cuba, and until recently China and USSR What are some advantages and disadvantages? Advantages: Country can change economy rapidly, health care and public services are given to everyone. Disadvantages: not designed to meet the wants of consumers, no incentive to work, unexpected results, large group of people have to make decisions.

Market Economies Market Economies: people and firms act in their own best interests to answer the WHAT, HOW, and FOR WHOM questions. Examples: USA, Japan, South Korea, Germany, France, Singapore, Canada, etc.. Advantages: over time, these economies are able to adjust to change; high degree of individual freedom; relatively small degree of government interference (the current economic crisis will hopefully be a short-term exception); decision making is decentralized and varied; great variety in goods and services produced/provided; high degree of consumer satisfaction.

Market Economies 3 conditions that lead to market economy failures. Disadvantages: does not provide for the basic needs of everyone in the society; does not provide enough of the services that people highly value; high degree of uncertainty for workers and businesses as a result of change; potential failure when 3 conditions are not met. 3 conditions that lead to market economy failures. 1. Markets are no longer competitive: not allowing enough competition between producers to offer the best value for a competitive price.

Market Economies 3 conditions that lead to market economy failures (cont’d…) 2. Resources are no longer relatively free to move from one activity to another. 3. Consumers no longer have access to adequate information so as to best weigh the alternatives and make wise/informed choices. a.k.a.: transparency