1. Economic Systems
Chapter 2 – Sections 1 & 2

2. Economy
Economy = an organized way of providing for the wants and needs of a nation’s people
Three types:
Traditional
Command
Market Economy

3. Traditional Economy
Traditional economy = the allocation of scarce resources comes from ritual, habit, or customs
People not free to make decisions on what they want
Examples:
Eskimos of Canada
Aborigines of Australia

4. Command Economy
Command Economy = economy in which the government makes decisions on what is produced, how it is produced and for whom
The people have very little influence
Also called socialist
Examples:
North Korea
Cuba
Former Soviet Union

5. Advantages: It can change direction in a short time Example:
Soviet Union went from being a rural agricultural society to a heavy industrial society
Health and public services are available to everyone

6. Disadvantages: Doesn’t meet wants of consumers
Doesn’t give people motivation to work hard
Requires a large bureaucracy to keep it running
People with new ideas can’t get them created

7. Market Economy
Market economy = a system where goods and services are sold on a free market to consumers for a profit with little government interference
Also called capitalism
US, Japan, Germany, etc

8. Advantages: Over time it can adjust to changing wants
Has a high degree of individual freedom
Very little government interference
Decision making is decentralized – in the hands of billions
Huge variety of goods and services available
High degree of consumer satisfaction

9. Disadvantages: Doesn’t provide for the basic needs of all the people
Doesn’t provide enough of the services that people value highly (education, defense, etc)
High degree of uncertainty of workers if they will keep their jobs

10. Market economy can fail if three conditions are not met:
Markets must be competitive
Resources must be free to move
Consumers need access to info to make wise decisions

11. "The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.“
~ Winston Churchill

12. Competition & Free Enterprise
Free Enterprise = competition is allowed to flourish with little government interference
Another way to describe America’s economy
Five characteristics:
1) Economic freedom
2) Voluntary exchange
3) Private property rights
4) Profit motive
5) competition

13. 1) Economic freedom: 2) Voluntary Exchange:
Freedom to choose occupation
Can work for yourself or someone else
Work anywhere or anytime
2) Voluntary Exchange:
The act of buyers and sellers freely engaging in transactions
Both buyer and seller get something

14. 3) Private Property Rights:
people to own &control their possessions as they wish
Tangible property: cars, houses
Intangible Property: skills and talents
Gives a person motivation to work, save, and invest

15. 4) Profit Motive: 5) Competition:
The driving force that encourages people and businesses to improve their well being
People are free to risk their wealth on a business
If it does well, they make a profit
5) Competition:
The struggle among sellers to attract consumers while lowering costs

16. The Role of the Entrepreneur
Entrepreneurs organize and manage land, capital, and labor to make a profit
Want to be their own boss and are willing to risk everything
If he is successful:
workers get better jobs
consumers get better products
gov’t gets more taxes

17. The Role of the Consumer
Consumers are the driving force behind production
If they don’t like a product, a business will fail, if they like it a business will prosper
Consumer wants change frequently

18. The Role of Government
The government plays several roles in the economy:
1) protector:
Laws against unsafe food and cars
Laws against discrimination in workplace
2) provider and consumer
Gov’t supplies defense, education, public services
Gov’t also consumes many products

19. 3) regulator: Federal gov’t regulates commerce, communication, banking
State gov’t regulates insurance rates
Local gov’t regulates zoning permits
Most businesses don’t like to be told what to do
However, this helps protect the consumer

20. 4) promoter of national goals
Gov’t functions change the system to achieve freedom, efficiency, security, full employment, etc.
The US is said to have a mixed economy – one where people buy and sell freely, but are subject to some government regulation