1. Chapter 21 Overview Notes: The 3 Basic Economic Systems in the World Today

2. People have unlimited wants – things we would like to have or to do People can never be wholly satisfied because we have limited resources to meet these unlimited needs We have only so much time, energy, and resources to satisfy our needs and our wants A landlocked nation would have different wants by people than people in an island country. So, every society must answer three basic economic questions:

3. Q: What must we produce? A: Society must choose based on its needs Q: How should we produce it? A: Society must choose based on its resources Q: Who should get what we produce? A: Society must choose based on its population and other available resources  And societies answer these three basic economic questions in different ways:

4.  Some follow traditional ways to answer these three questions by producing what their ancestors produced, using the same time-honored traditional methods  In other societies, a ruler or government tells everyone what to do and decides who gets what is produced  A third way to answer these questions is based on economic freedom

5.  Traditional Economic System: What is produced and what each person does is determined by birth The share of wealth is determined by custom or one’s position in society  hunting and gathering  subsistence farming

6.  Command Economic System: The ** individual ** has very little to say as to how the basic economic questions are answered. What is produced and what each person does might be determined by a small group of individuals.

7.  Socialism  formed first as a political movement in response to the injustices of industry and the exploitation of workers  reformers wanted laws passed that would protect the working class and even have government to own some businesses for the workers’ benefit, forming their own parties across Europe  Later, socialists argued that the government should own basic industries, and provide essential services, like free schooling, low-cost housing, inexpensive public transportation, and a national health program.  Examples: Iran, North Korea, Russia

8.  Communism (Scientific Socialism) by Karl Marx  Workers create value through their labor ; business owners used their power to take advantage of workers by taking for themselves most of the value of what the workers produced  Capitalists (“haves” / bourgeoisie ) paid the workers (“have-nots” / proletariat ) just enough to survive and the rest that was produced was kept by the owners; the owners got richer and the workers got poorer and when conditions for the workers got so bad, they would rise up and overthrow their capitalist rulers in a violent revolution China, Cuba, Soviet Union

9.  Market Economic System:  What is produced and what each person does is based on the market activity  Buyers and sellers decide for themselves what goods and services will be produced  Individuals decide for themselves the answers to the basic economic questions

10.  Free enterprise system = people have free choice of what to buy, where to work, and what to make = people make their own economic decisions  Right to own property (like homes, factories, farms, businesses) and to use that property as they see fit  Some invest their money or time in private businesses to produce and sell goods and services, hoping to make a profit

11.  Several producers make the same goods or promote the same services, giving consumers a choice in the type of goods available and how much they want to pay, forcing producers to attract consumers by improving quality and reducing prices, causing less efficient producers unable to compete and to go out of business

12.  The Prophet of Free Enterprise was Adam Smith  In his book The Wealth of Nations (1776)  The law of supply and demand determines prices and production and  only producers who make the best goods at the l owest prices survive, benefiting the entire economy  each person pursues his own interests in a free enterprise system, but that an “ invisible hand ” guides individual actions so that they actually work for the common good  favored a “ hands-off,” a “l eave-alone,” a “ laissez faire ” policy by governments

13.  Many countries today have what is called a mixed economy. Since governments have no money of their own, they must tax their businesses and households and other entities, and use those funds for the communities’ expenditures of roads, education, welfare, the environment, etc. This economy is neither purely market nor command.