1. Chapter 2
Economic Systems

2. Warm-up
“What is common to many is taken least care of, for all men have greater regard for what is their own than for what they possess in common with others.” – Aristotle
Identify, from your daily lives examples of the truth of this statement.

3. Key Terms
Economic system: a way society uses its scarce resources to satisfy its people’s unlimited wants.
Traditional economy: people produce and distribute goods according to customs handed down from previous generation.
Command economy: government makes all economic decisions.
Market economy: where individual choice and voluntary exchange direct economic decisions.

4. Traditional Economy One goal for these societies: to survive.
Men are the hunters and gatherers
Women tend to the crops and raise the family
The good of the group always takes precedence over individual desires.
Most traditional economies operate in emerging markets and developing countries. They are in Africa, Asia, Latin America, and the Middle East.

5. Traditional economy pros/cons
Produces what best ensures its survival (Pro)
Methods of production have not changed (Pro)
Distribution based off custom and tradition (Pro)
Little disagreement over economic goals and roles (Pro)
Cons: resist change, underutilization?
Prevent people from doing job they are most suited for
Low standard of living, based off low material wealth.

6. Command Economy
Government controls all decisions on what to produce, how, and for whom based off their judgement. (Centrally planned economy)
Wants of individuals are rarely considered
Controls all means of production (all resources and factories)
Examples today are North Korea and Cuba

7. Command Economy cont. 2 different types: Socialism and Communism
Socialism: when the government owns some or all of the factors of production.
Communism: is a more extreme version of socialism in which there is no private ownership of property and little to no political freedom. Essentially a authoritarian society.
Discussion Question: How are socialism and communism similar yet different?

8. Command Pros/Cons
Pros: seek to provide for everyone (even the sick and elderly population)
Can use nation’s resources to produce items that may not make money in a market economy (ex. Medicines)
Cons: decisions frequently misguided
Workers have little motivation to improve productivity
Face shortages of goods and products, people have to wait in long lines waiting to buy goods.

9. Market Economy KEY CONCEPTS
Private property rights—right to own businesses and resources
Property means material objects, money, intellectual property, labor
Market—place or situation where people buy and sell goods, services

10. Advantages of Market Economies
Individuals free to make economic choices, pursue own work interests
Less government control means political freedom, less bureaucracy
Locally made decisions mean better use of resources, productivity
Profit motive ensures resources used efficiently, rewards hard work
— resulting competition leads to higher-quality, more diverse products

11. Disadvantages of Market Economies
Pure market economy has no way to provide public goods and services
Does not give security to sick or aged
During U.S. industrial boom, business owners rich, workers low pay
Businesses did not address problems caused by industrialization
Industrialized societies adopt some government control of economy

12. Warm-up 9/18 How did you and your family fare during the hurricane?
What examples of supply and demand were you exposed to while preparing for the hurricane? (think supplies and $) Why do you think this occurred?

13. How each system answers the 3 basic economic questions
Traditional: What: what has always been produced, How: traditional ways, for whom: good of the group
Command: What: government, how: government owned facilities, for whom: the whole group
Market: what: goods consumers will buy are produced, how: individually owned enterprises, for whom: for people who can afford them

14. Specialization and Markets
Specialization—people concentrate their efforts in the activities they do best
— encourages efficient use of resources
— leads to higher-quality, lower-priced products

15. Private Property and Markets
Private property rights must be defined and protected by law
Buyers must be sure sellers have right to sell products they offer
Sellers must be sure they will be paid for their products

16. Limited Government Involvement
Laissez faire—government should not interfere in economy
Capitalism—system having private ownership of factors of production — says producers will create products consumers demand
Actual market economies all have some government involvement

17. Voluntary Exchange In Markets
Voluntary exchange—traders believe they get more than they give up
In market economy, most trade is exchange of product for money
Profit—financial gain from business transaction

18. Competition and Consumer Sovereignty
Competition—sellers’ efforts to get business by offering best deal
Consumer sovereignty—buyers choose products, control what is produced
Competition controls self-interested behavior — sellers offer low price or high value to please consumers, make profit

19. Mixed Economies
Mixed economy has elements of traditional, command, market systems
— most common type of economic system
Traditional, command, market economies adopt elements from others

20. Life in a Mixed Economy
Family farming in U.S. serves as example of mixed economy
— traditional: all members of family help bring in harvest
— command: affected by government—public school, roads, Social Security
— market: own land, sell their products in competitive market

21. Types of Mixed Economies
Most economies emphasize one type; U.S. basically has market system
Many European countries greater mix of market and command elements
— France—government controls some industries; provides social services
— Sweden—state owns part of all companies; lifelong benefits, high taxes
— Namibia—traditional; state supports market, foreign investment

22. Trends in Modern Economies
Economies change in response to natural, social, political changes
East European economies changed after fall of communism

23. Changes in Ownership
Economies in transition often go through changes in ownership
To nationalize is to change from private to government ownership
To privatize is to change from government to private ownership

24. Circular Flow in Market Economies
Circular flow model illustrates how interactions occur in a market
Represents the two key decision makers: households, businesses
Shows the two markets where households and businesses meet
— goods and services
— resources

25. Product Market
Product market—market where goods and services bought and sold
— includes all purchases by individuals from businesses

26. Factor Markets Factor market—market for the factors of production
— land, labor, capital, entrepreneurship
Individuals own all factors of production
— own some outright, such as labor; some indirectly, such as stocks
— individuals are producers; businesses are customers

27. Circular Flow Circular flow model shows how market economies operate
— outside arrow shows flow of money
— inside arrow shows flow of resources and products

28. Circular Flow

29. Warm-up 9/20 “Outsourcing”
As American companies expand and do business all over the globe, certain problems have arisen. One issue is outsourcing jobs-for example, transferring manufacturing jobs to workers overseas.
The rationale is that outsourcing enables companies to produce their goods for less. Workers in some countries accept lower wages than U.S. workers. Hiring these workers to produce goods helps the economy of the country where they live and work however, it can also mean a loss of manufacturing jobs in the U.S.

30. “Outsourcing” cont.
Do you think the U.S. government should act to stop companies from outsourcing manufacturing jobs? Why or why not? What action shoud it take? Write a paragraph for your answer.

31. Increasing Global Ties
Growth of global economy—economic actions across national boundaries
— recent agreements open up world markets to trade among countries
— fast, safe, cheap transport of resources, products eases distribution
— phone, computer links make financial transactions quick, inexpensive
— cross-border business partnerships lower research, production costs

32. India Globalization Activity
In a group of 3-4 students, search the Web for information about how India’s economy has changed during the last 20 years. Pay particular attention to the relationship between U.S. businesses and Indian businesses.
Answer the following questions: How has the availability of computer training in India affected the Indian economy?
Why have many U.S. companies developed relationships with Indian companies and workers in recent years? (Be prepared to share your answers with the class)

33. Globalization Activity Part 2
In your same groups, on the computers, look into whether globalization could be more accurately described as the corporatizing of the world.
Why do some people see globalization as the corporatization of the world. What evidence exists to support this point of view? What evidence supports the opposing view?
Be prepared to share your answers and sources to the class, you have 20 minutes.

34. Quiz Review Know circular flow model
Know fundamentals of market economy
Know 3 different types of economic systems
Vocab
Understand product and factor market