ECONOMIC SYSTEMS CHAPTER TWO

TRADITIONAL - Economic decisions are based on custom, habit or ritual. Life and economic decisions revolve around the family.  Roles are defined by gender. Fathers teach sons, mothers teach daughters Communities are small and close.  The entire group is supported. Agriculture and hunting primary activities.

Unable to deal with environmental disasters Slow to adopt new technology or methods Lack modern conveniences Low standard of living WEAKNESSES

CENTRALLY PLANNED (or Command) – Government makes all the economic decisions Government controls resources and production Can quickly change production in selected industries Guarantees jobs and incomes Karl Marx

Cannot meet consumers’ needs or wants Workers lack incentive to work hard Large expensive bureaucracy needed to make production decisions Individual freedoms sacrificed WEAKNESSES

MARKET – Economic decisions are made by individual buyers and sellers Individuals specialize Self-interest or personal gain is the motivating factor Responds efficiently to changing market conditions Provides freedom of choice Encourages economic growth Very little government interference

No guarantee of economic equity (fairness). There is an unequal distribution of wealth. There is no economic security- you are free to succeed or fail WEAKNESSES

MARKET SYSTEMS – Individual buyers and sellers make decisions. All markets have buyers and sellers  Loan market  Stock market  Factor/Resource market  Product market

Money Payments (Sales Dollars) PRODUCT MARKET HOUSEHOLDSBUSINESS FIRMS Goods and Services Productive Resources (Land, Capital, Labor and Entrepreneurship FACTOR MARKET Money Income Payments: Rents, Interest, Wages and Salaries, Profits The Circular Flow of A Market Economy $$$ Households are buyers in the product market Firms are sellers in the product market Households are sellers in the factor market Firms are buyers in the factor market