C HAPTER 2: E CONOMIC S YSTEMS AND THE A MERICAN E CONOMY Section 1: Economic Systems

T HREE B ASIC Q UESTIONS What should be produced? How should it be produced? For whom should it be produced?

T YPES OF E CONOMIC S YSTEMS Traditional System Command System Market System Mixed System

T RADITIONAL E CONOMIC S YSTEM Two types- Tribal and Agricultural Characterized by subsistence level farming, barter, and little job specialization Advantage- family and community ties are very strong and you know what is expected of you Disadvantages- Resistant to change and suspicious of outsiders

C OMMAND E CONOMIC S YSTEM Also referred to as a Communist system. Government leaders control the factors of production The government makes all economic decisions The central planning agency decides what is to be produced, how much people should be paid, what education is available to people based on what job they will be doing, and what jobs people will do. Advantages- Decisions can be made quickly in time of war as to how to control necessary resources Disadvantages- lack of incentive, poor quality goods, inefficient work habits, lack of consumer choice Exs- North Korea and Cuba

M ARKET S YSTEM Also called a capitalist, free-market system, or free enterprise system. The US was basically a capitalist system before the Great Depression; we followed a laissez-faire approach to the economy Characterized by the circular flow of economic activity- People work for businesses; businesses produce goods and services; businesses pay workers; workers buy the goods and services. It is driven by profit.

M ARKET S YSTEM CONT ’ D Advantages- Competition  better products, better use of time, private property, profit Disadvantages- your usefulness/value is determined by how productive you are, or how much money you can make. So who takes care of those who can’t work like the disabled or children? What about the elderly who worked for many years but are unable to work anymore? What happens to them? Do we say to them they are no longer useful? Then what? Is this moral?

M IXED E CONOMIC S YSTEM A system that combines characteristics of more than one type of system. Examples include the Socialist systems in Canada and England, and the American system that mixes elements of capitalism and elements of socialism. Private ownership of property and individual decision making are combined with govt. intervention and regulation to protect the interests of society as a whole.

P URE S YSTEMS C ANNOT SURVIVE Traditional are resistant to change Command- destroy incentive to work hard Market- greed driven by profit motive without regulation leads to monopolies  destroy competition. Without competition, there is no incentive to work hard