1. ECONOMICS- TYPES OF ECONOMIES CHAPTER 2, LESSON 1

2. ECONOMIES BASED ON TRADITION  In a society with a traditional economy, the use 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 generally not free to make decisions on the basis of what they want or would like to have.  Instead, their roles are defined by the customs of their elders and ancestors.

4. ADVANTAGES OF A TRADITIONAL ECONOMY  The main advantage of a traditional economy is that everyone knows which role to play.  Everyone knows what to produce.  If you are born into a family of hunters, you hunt. If you are born into a family of farmers, you farm.  Everyone knows how to produce.  because you do things much the same way your parents did.  The FOR WHOM question is determined by the customs and traditions of the society.  In some societies, you would provide for your immediate family. In others, such as the Inuit, you would share what you have hunted with all the families of the village.

5. DISADVANTAGES OF A TRADITIONAL ECONOMY  The main drawback of a traditional economy is that it tends to discourage new ideas and new ways of doing things.  Strict roles in a traditional society, punishing people who act differently or break the rules.  The lack of progress due to the lack of new ideas and new ways of doing things leads to economic stagnation and a lower standard of living than in other economic systems.

6. BELL RINGER  Please answer the following questions on a sheet of scratch paper.  1) What is the main advantage of a traditional economy?  2) What is the main disadvantage of a traditional economy?

7. COMMAND ECONOMIES  In a command economy, a central authority makes the major decisions about WHAT, HOW, and FOR WHOM to produce.  A command economy can be headed by a king, a dictator, a president, a tribal leader, or anyone else who makes the major economic decisions.  Socialism is an economic and political system in which the government owns some, but not all, of the factors of production.  As such, the government plays a major role in answering most of the major WHAT, HOW, and FOR WHOM questions.

8. CHARACTERISTICS OF A COMMAND ECONOMY  In a pure command economy, the central governing authority makes all of the major economic decisions.  The government owns most of the resources in the economy.  Most command economies severely limit private property rights.  That means that people are not allowed to own their homes, businesses, and other productive resources, although they may have some personal items like clothing and tools.

9. SOCIALIST ECONOMIES  Socialist economies share many of the same characteristics of pure command economies.  Only fewer resources are owned or controlled by the central authority.  Under socialism, the stated objective of the government is to serve the needs of its people, not just enhance the welfare of its leaders.  Most socialist economies tend to be larger than traditional economies.  Both the pure command as well as socialist economies share a common trait—the major economic decisions are made for the people, not by them.

10. BELL RINGER  On a piece of scratch paper, answer the following questions.  1) What is the main goal of socialism?  2) What is the major characteristic trait that both command economies and socialist economies share?

11. ADVANTAGES OF A COMMAND ECONOMY  A major strength of a command system is that it can change direction drastically.  The former Soviet Union went from a rural agricultural society in 1910 to an industrial nation in a few decades by emphasizing the growth of heavy industry.  A major advantage of a socialist command economy is that it allows most citizens to receive some goods and services that they would otherwise not be able to afford.  Ex.- Universal health care, free college tuition…

12. DISADVANTAGES OF A COMMAND ECONOMY  1- Leaders of command economies usually provide for themselves at the expense of the general population.  The result is that high government officials have nice cars, houses, and plenty of food while the average citizen may be forced to go without.  2- Loss of the individual freedom to choose.  For example, someone who does not want the services of national health care ends up paying for it anyway because it has been made available to others.  3- Production of low-quality goods.  Workers who are unhappy with where and how they are supposed to work are often given quotas to fill as a way to stimulate production.

13. DISADVANTAGES OF A COMMAND ECONOMY  4- An economy with major elements of command requires a large decision- making bureaucracy.  In the former Soviet Union, an army of clerks, planners, and other administrators was needed to make the production and distribution plans for even the most basic products.  5- Rewards for individual initiatives are rare in both command and socialist economies.  In the early years of the Soviet Union, all workers were paid about the same, regardless of their occupation or how hard they worked in each profession.  The result—and a very important one—is that economies with relatively uniform wages for different occupations and effort do not provide much incentive for people to learn or work.

14. DISADVANTAGES OF A COMMAND ECONOMY  6- A planning bureaucracy lacks the flexibility to deal promptly with major problems, or even minor day-to-day ones.  As a result, command economies tend to lurch from one crisis to the next—or collapse completely, as did the former Soviet Union.  Almost all countries are connected by foreign trade, so it is possible for a problem in one part of the world to be quickly transmitted to another.  7- Pure command economies tend to stay relatively small because they have such a hard time making all of the decisions necessary for growth and change to take place.  It is easy for a ruler to make all of the major decisions in a small tribal economy, but when the economy reaches the size of a small country, too many decisions are needed to make it grow satisfactorily.

15. TINSTAAFL  Goods and services are never free, even if the country has an economy directed by socialism.  TINSTAAFL, or There Is No Such Thing As A Free Lunch, still applies to socialist economies.  In more developed European countries such as Denmark, Sweden, and Norway, programs like free education and national health care are funded with high domestic tax rates.  As a result, the tax rates in these countries are higher than those in the United States.

16. ECONOMIES BASED ON MARKETS  A market economy is one in where the 3 questions of production are answered by the people based of their interests.  The Law of Supply and Demand.  A market economy have a great deal of freedom. People can spend their money on the products they want most, which is like casting dollar “votes” for those products.  This tells producers which products people want most and answers the question of WHAT to produce.  Businesses are free to find the best production methods when deciding HOW to produce.  Finally, the income that consumers earn and spend in the market determines FOR WHOM to produce.  Market economies also feature the private ownership of resources. A market economy is often described as being based on capitalism—an economic system where private citizens own and use the factors of production for their own profit or gain. The term capitalism draws attention to the private ownership of resources, while the term market economy focuses on where the goods and services are exchanged. As a result, the two terms focus on different features of the same economic system.

17. ADVANTAGES  The first advantage of a market economy is its high degree of individual freedom.  People are free to spend their money on almost any good or service they choose.  People also are free to decide where and when they want to work, or if they want to invest further in their own education and training.  At the same time, producers are free to decide what they want to produce, whom they want to hire, which inputs they want to use, and the way they want to produce.  The second advantage of a market economy is that it adjusts gradually to change over time.  For example, before gas prices rose sharply in 2005, gas was cheap and people tended to buy large gas-guzzling SUVs.  When the price of gas rose sharply in that year, SUV sales fell, and smaller, more fuel-efficient vehicles became popular.

18. ADVANTAGES  A third advantage is the relatively small degree of government interference.  A fourth advantage is that decision making is decentralized.  Collectively, consumers make the decisions that direct scarce resources into the uses they favor most, so everyone has a voice in the way the economy runs.  A fifth advantage of the market economy is the variety of goods and services that are produced.  You can find a product for just about any use or occasion.

19.  A sixth advantage is the high degree of consumer satisfaction.  In a market economy, the choice one group makes does not affect the choices of other groups.  Yet another advantage of a market economy is that goods are usually privately owned, and privately owned goods last longer than goods owned by others.  In a world of relatively scarce resources, it makes sense to have an economic system that takes better care of property.

20. DISADVANTAGES  The market economy does not provide for everyone.  Some people may be too young, too old, or too sick to earn a living or to care for themselves.  These people would have difficulty surviving in a pure market economy without assistance from family, government, or charitable groups.  A market economy also may not provide enough of some basic goods and services.  Finally, a market economy has a high degree of uncertainty.  Workers might worry that their company will move to another country in search of lower labor costs.  Employers may worry that someone else will produce better or less expensive products, there by taking their customers.