1. U1C2 Economic Systems and Decision Making

2. Main Idea
Scarcity is the situation that exists when there are not enough resources to meet human wants. An economic system is the way in which a society uses its scarce resources to satisfy its people’s unlimited wants.

3. Essential Question
How does a society decide the ways to use scarce resources to meet unlimited wants?

4. Traditional Economy: age-old customs and beliefs
Economic System
Traditional Economy: age-old customs and beliefs
Market Economy: individuals and businesses
Command Economy: government

5. Key Concepts to address scarcity, societies must answer 3 questions:
What should be produced?
How should it be produced?
For whom should it be produced?
the answers shape the economic system a society has 3 types: traditional economy, command economy, and a market economy

6. Traditional Economy
Families, clans, or tribes make economic decisions based on customs and beliefs that have been handed down from generation to generation, with the one goal being survival
everyone has a role; there is no deviation; the good of the group takes precedence over individual desires

7. Command Economy
government decides what goods and services will be produced, how they will be produced, and how they will be distributed
individual consumers are rarely considered
government usually owns all means of production: all resources and factories
Examples: North Korea, Cuba; before communism’s collapse in Europe-Soviet Union, Poland, East Germany

8. Market Economy based on individual choice, not government directives
producers decide what goods or services they will offer
individuals act in own self interest when they make economic choices; as they seek to serve their own self interest, they also benefit others

9. Characteristics of Traditional Economies
All societies were once traditional economies
tends to be inefficient and does not adapt to change
Advantages: clearly answers 3 economic questions, little disagreement over economic goals and roles
Disadvantages: because they are based on ritual and custom, they resist change; productivity is low; lower standard of living
Cell phones are splitting up traditional economies

10. Command Economies command economies today government controls
North Korea: many command elements
Many disadvantages: inefficient, lack of political freedom
all features of economy
socialism
communism

12. Socialism and Communism
Socialism: economic system in which the government owns some or all of the factors of production, developed by the ideas of Karl Marx
Communism: extreme form of socialism-no private ownership of property, little or no political freedom- authoritarian socialism

13. Comparing Economic Systems
Communism
Socialism
Market System
government owns resources
government planners decide how resources are used
government makes all economic decisions
government owns basic resources: the rest are privately owned
government planners allocate basic resources; market forces allocate privately- owned resources
all resources are privately owned
market forces allocate resources
government’s role limited-mostly to ensure market forces are free to work

14. Karl Marx great impact on 20th-century economic and political thinking
German philosopher, historian, and economist
major accomplishment: detailed analysis of capitalism and foundation for socialist economic theory in The Communist Manifesto (1848) & Das Kapital ( )
famous quote: “Workers of the world unite; you have nothing to lose but your chains.”
influenced: Russian Revolution, 1917; Chinese Revolution, 1949

15. Command Economies Today
no pure command economies today, but North Korea has mostly command elements
late 1990s, early 2000s scarce food caused millions of N. Koreans to die from hunger and malnutrition
economy actually shrank during this time
2003: some restrictions relaxed to revive country’s economy

16. Impact of Command Economies
advantages: seek to provide for everyone, sick, old, no longer productive
In practice, a lot of disadvantages: economic decisions misguided, low worker motivation, resources not used wisely, prices set well below that which would be set in a market system
light bulbs in Soviet Union
estimates suggest that policies of command economies are responsible for more deaths than two world wars

17. Fundamentals of a Market Economy
Government Involvement: minimal government intervention
Voluntary Exchange: buyer & seller each believe benefits outweigh costs
Profit: sellers are free to attempt to maximize profits
Competition: sellers are free to get the business of others
Consumer Sovereignty: buyers can decide whether to buy or not
Specialization: buyers & sellers can concentrate on areas where they think they have an advantage
Private Property: buyers & sellers are free to use & own private property
What is a market is and how does it work?

18. market economy limited government involvement
voluntary exchange, competition, consumer sovereignty
market economy
specialization
What are the main features of a market economy? There are 6 of them.
private property rights

19. Impact of Market Economies
Advantages: economic and political freedom; profit
Disadvantages: provides no mechanism for public goods and services, like defense; cannot provide security to those who, because of sickness or age, cannot be economically productive; cannot prevent the unequal distribution of wealth
What are the advantages and disadvantages of a market economy?

20. many different types: USA-market oriented
France, Sweden- more command oriented
move away from command elements: privatization of resources increasing globalization
today’s mixed economies
trends in modern economies
modern economies

21. Today’s Mixed Economies
mixed economy: elements of traditional, command, and market economies
is most common type
U.S. has a market economic system with command and traditional elements
France & Sweden are mixed economies with stronger command elements than the U.S.; in France government owns many industries and citizens receive health care/education, in Sweden, government owns one third of businesses and citizens get cradle to grave social benefits
Focus Question #1: What are the main characteristics of a mixed economy? Most common type with elements of traditional, command and market economies.
Focus Question #2: Why are most modern economies mixed economies? They use the best elements of all of the systems to create a system that works for them.

22. Trends in Modern Economies
economies change and are always changing
nationalize: to change from private to government or public ownership
privatize: to change from government or public to private ownership
economic globalization: foreign trade is higher today than ever before; economic partnerships among nations serve the interests of both parties
Focus Question #3: Why are modern economies becoming increasingly global? Foreign trade has increased, economic partnerships among nations benefits all.

23. Contrasting Economies: North Korea and South Korea
North Korea: command economy, mostly military spending by government, low GDP, isolationist country with little trade, famine is common
South Korea: market economy, increasing GDP