1. Eco 2/1 Economic Systems

2. Way in which a nation uses its resources to satisfy its people’s needs and wants.

3. Three Basic Questions Every nation must decide: 1.What should be produced? 2.How should it be produced? 3.For whom should it be produced?

4. What Should Be Produced? Scarcity and trade-offs mean we have to choose what to produce and what NOT to produce. If a city hires more cops, it won’t hire more teachers. If an auto company produces more minivans, it will produce fewer pick- ups.

5. How Should It Be Produced? Will more laborers be hired? Skilled or unskilled? Will capital goods be used to manufacture and reduce the need for labor?

6. For Whom Should It Be Produced How will goods and services be distributed among the people? Who gets new cars? Who lives in the new apartments? In U.S. it’s decided by a price system.

7. Types of Economic Systems 1.Traditional 2.Command (controlled) 3.Market (capitalist, free enterprise) 4.Mixed

8. Traditional System Answers the 3 basic questions according to tradition. Economic decisions are based on customs and beliefs, handed down generation by generation. You’re a farmer, your father was a farmer, etc. Farming doesn’t change…

9. Traditional Economy Advantages You know what’s expected of you. Disadvantage Change is discouraged.

10. Command Economy Gov’t, not tradition controls factors of production. Small group decides what to produce, how to produce it, for whom to produce

11. Command System Advantages Speed with which resources can be rerouted. If war is likely, gov’t stops civilian production, allows only military. Disadvantages No incentive to work hard or innovative, lack of consumer choices

12. Examples of Command Economies North Korea Cuba

13. Market Economy Also called “capitalism” or “free enterprise” Economic decisions are made by individuals looking out for their best interests. Individuals own factors of production, choose what to produce and how to produce it. Choose what to buy. Decisions are made not by tradition or gov’t, but by market prices.

14. Market Not a place. It’s the voluntary exchange of goods/services between buyers and sellers. Example: buying/selling oil in the worldwide market babysitting services in the neighborhood.

15. Market System As prices change, they signal the market. High price means the good is scarce. Low price means it’s relatively abundant.

16. Market System The freedom of prices to rise and fall results in a neutral, self-organizing, incentive-driven system.

17. Circular Flow of Economic Activity Dollars flow from businesses to individuals and back to businesses. Business pays income to individuals who spend the money buying goods and services from businesses.

19. Pure Market System Advantages: Freedom to chose career, buy property, spend or save money, take risks, earn profits Disadvantages: those too sick, old, young, etc. can’t take of selves without gov’t or charitable aid.

20. Mixed Economy Combines elements of a market economy with a command economy. Private ownership of property and individual decision making are combined with government intervention. US: individuals make decisions and drive the economy, but government makes laws and regulates economic activity.