Economics Chapter 2 Section 1

Economic systems Economic system- an organized way of providing for the wants and needs of the people 3 major economic systems- traditional, command and market

Traditional Economy Traditional economies- the allocation of scarce resources and nearly all other economic activity stems from ritual, habit or custom Many indigenous people around the world live by this economy Strength- everyone knows what role to play, they know what to produce & how, the for whom question is determined by custom and tradition

Traditional Economy Disadvantages- tends to discourage new ideas and new ways of doing things, punishing people who act differently or break rules Lack of progress leads to a lower standard of living

Command Economies Command economy- a central authority makes most of the what, how, and for whom decisions N. Korea and Cuba are two examples The gov’t determines needs, decided goals, and sets production quotas for most industries The state will shift resources to meet suspected needs

Command Economies Advantages- can change direction drastically in a relatively short time. Many health and public services are available to everyone at little or no cost. Disadvantages- not designed to meet the wants of consumers and therefore people are asked to sacrifice for the good of the state. No incentive. How the state judges production can effect the product. Many clerks, planners, and administrators are needed= slow decisions

Market Economy Market economy- people and firms act in their own best interests to answer the what, how and for whom questions Market is an arrangement for buyers and sellers to come together to exchange goods and services U.S., Japan, S. Korea, Germany…

Market Economy Advantages- over time it can adjust to change- supply and demand, high degree of individual freedom for producers and consumers, relatively small degree of gov’t interference, everyday economic decisions by individuals, almost any product can be produced if they have a buyer, and high degree of consumer satisfaction

Market Economy Disadvantages- does not provide for the basic needs of everyone, gov’t must provide services that are needed to support various people and needs, jobs come and go 3 needs- markets must be reasonably competitive, (2) resources must be able to move (jobs), (3) consumers need access to adequate info Gov’t must make sure these needs exist