Economic Systems and Decision Making Chapter 2

Economic Systems The survival of any society depends on its ability to provide food, clothing, and shelter for its people. All societies have something else in common. They have an economy or economy system – an organized way of providing for the wants and needs of the people

Foldable – Chapter 2, sec. 1 Include the following: Title 5 points Information must include: definition and examples, advantages and disadvantages (3 systems) 60 points Followed Instructions/color 5 points Total 75 points Turn in for a grade

Economic Systems Traditional Command Market

Traditional the allocation of scarce resources, and nearly all other economic activity, stems from ritual, habit, or custom. Habit and custom also dictate most social behavior. Individuals are not free to make decisions based on what they want or would like to have. Instead, their roles are defined by customs of their elders and ancestors.

-discourages new ideas and new ways of doing things ADVANTAGES Everyone knows which role to play You produce what your family had always produced How – the same way your parents did For Whom- determined by customs and traditions DISADVANTAGES -discourages new ideas and new ways of doing things

How would your life be different if you had grown up in a traditional economy?

Command Economics One in which a central authority makes most of the What, How, for Whom decisions. Economic decisions are made by the government: the people have little, if any , influence over how the basic economic questions are answered. (Pure Economy)

Socialism (more, modern view) Economic system which government owns some factors of production and has a role in determining what, how and for whom goods are produced

Pure Command Economies and Socialist Economies share a common trait – the major economic decisions are made for the people, Not by them!

ADVANTAGES it can change directions drastically in a relatively short time Health and public services are available to everyone at little or no cost, regardless of income

DISADVANTAGES -it is not designed to meet the wants of consumers, even though many basic needs are provided. -the system does not give people incentive to work hard (receive similar wages regardless of skill) -Requires a large decision-making bureaucracy Cont…

-No flexibility to deal with day to day problems -People with new or unique ideas find it difficult to get ahead in a command economy

In a market economy, people’s decisions act as votes. Capitalism – where private citizens own and use the factors of production for their on profit People and firms act in their own interests to answer the WHAT, HOW, AND WHOM questions. In a market economy, people’s decisions act as votes.

Advantages Over time, it can adjust to change Its high degree of individual freedom – producers may make whatever they think will sell Relatively small degree of government interference That decisions making is decentralized or not concentrated in the hands of a few Variety of goods and services available to consumers The high degree of consumer satisfaction

Disadvantages It does not provide for the basic needs of everyone in the society It does not provide enough of the services that people value highly (defense, education) so, the government must provide these services, paid for by tax dollars Relatively high degree of uncertainty that workers and businesses face as a result of change.

Mixed Economies Lesson 2

Mixed Economies – economic systems where tradition, government, and markets each answer some of the WHAT, HOW, and FOR WHOM questions.

Traits of a Mixed Economy Most countries have a Mixed Economy. However, a Mixed Economy is not an economic system but rather a blending of two different types of systems. The government controls large industries, while private individuals control small businesses. Citizens are taxed heavily to provide all citizens a social safety net such as welfare, free university tuition and free health care.

Cont. Property is controlled by both the government and private individuals. Workers tend to be somewhat less productive than those in market economies, but less product then those in command economies. Consumers generally have a wide variety choices.

Examples of a Mixed Economy In France health care is free, university costs very little if you get in (many do not) and taxes are high. However, there are also private industries based out of France like Air France and Puegot (car company). In United Kingdom health care is free, university is cheap, but citizens can purchase private health insurance and attend private universities if they choose. The United States is not totally a market economy. It is a mixed economy. Example 1: The economy of the United States is based on private enterprise. However, some industries (for example, power companies and railroads in some areas) are under collective ownership.

Criticism of Mixed Economies Critics of mixed economies claim that they often result in unproductive workers because there is not as much incentive to work hard as there is in a market economy. As a result mixed economies often suffer from higher unemployment rates and lack the same number of entrepreneurs as market economies. Mixed economies often must raise taxes in order to sustain all of the social services such as welfare, free health care, low cost university education and pension systems for the elderly which can lead to a stagnant economy. In essence, critics claim that mixed economies enable irresponsible behavior.

Which economic system is best? The market system has proven to be best because it promotes the goals of growth, freedom, & efficiency. Citizens are free to own their own property and use it in the most efficient and profitable way. Command and traditional systems sometimes offer more security but are not nearly as strong in efficiency, growth, freedom, and environmental quality.

The Global Transition to Capitalism Lesson 3

Why Capitalism? Capitalism is the most powerful engine for generating wealth It has improved nearly everyone’s standard of living

Problems of Transition Privatization – the conversion of state owned factories and other property to private ownership -Important because people tend to take better care of something that they own -some countries used Vouchers Loss of Political Power Responding to new incentives Understanding the cost

Countries and Regions in Transition In Russia, the decades-long transition to capitalism has resulted in the current market-based economy, with the exception of government-controlled energy, natural resource, and defense-related industries. After the failure of the Great Leap Forward, China was influenced by successful market economies in Asia and today is undergoing some privatization and other capitalistic endeavors.

Cont. In Latin America, socialism still exists in Venezuela and Argentina, but Chile has made the transition to capitalism. After the Soviet Union collapsed, many Eastern European countries transitioned to capitalism, including Poland, Hungary, the Czech Republic, and Slovakia. Compared to the U.S. government, the Japanese government is much more involved in the day-to-day activities of the private sector.

Cont. By opening its markets to world trade, South Korea has progressed from one of the poorest countries in Asia in the mid- 1950s to a leading producer of electronics and automobiles today. The government in Singapore has focused on a few select industries, pouring money and resources into pharmaceuticals, medical technology, and financial and high-tech industries. Taiwan has always depended on economic planning and was one of the early economic powers in Asia, but its centralized planning may hamper future economic growth.

Lesson 2 & 3 Activity Country Russia China Chile Japan South Korea Define: Mixed Economy and Communism Complete the following chart – How governments promote growth Country Russia China Chile Japan South Korea Turn in for a grade