1. Chapter 29 Comparative Economic Systems
Key Concepts
Summary
Practice Quiz
Internet Exercises
©2002 South-Western College Publishing

2. What is an economic system?
The organization and methods used to determine what goods and services are produced, how they are produced, and for whom they are produced

3. What are the basic types of economic systems?
Traditional
Command
Market

4. What is a traditional economy?
A system that answers the What, How, and For Whom questions the way they always have been answered

5. What is the benefit of a traditional economy?
There is little friction among members because relatively little is disputed

6. What are the disadvantages of a traditional economy?
Restricts individual initiative
Lack of advanced goods, new technology, and growth

7. What is a command economy?
A system that answers the What, How, and For Whom questions by central authority

8. What is the structure of a command economy?
It has a pyramid structure

9. The Command Economy Pyramid Supreme planning agency
Specialized planning agencies
Producing units
Consuming units

10. What are the strengths of a command economy?
Economic change can occur very quickly
Social welfare can be enhanced

11. What are the weaknesses of a command economy?
Decision makers have the power to be absolutely wrong
Quality and variety of goods suffer

12. Shortage of 400 thousand side mirrors
Central Planners Fixing Prices S
Price set by planners
$80
Shortage of 400 thousand side mirrors
$60 E
Price per side mirror (rubles)
$40
$20 D
200
400
600
800
1000
Quantity of side mirrors (thousands per day)

13. Planners set the price of mirrors below equilibrium
Shortage of mirrors
Planners set the price of mirrors below equilibrium

14. What is a market economy?
An economic system that answers the What, How, and For Whom questions using prices determined by the interaction of the forces of supply and demand

15. Who was Adam Smith?
The father of modern economics who believed that a free market economy acted like an “invisible hand”

16. What is the invisible hand?
A phrase that expresses the belief that the best interests of a society are served when individual consumers and producers compete to achieve their own private interests

17. What is the advantage of a market economy?
It provides a wide variety of goods and services that buyers and sellers exchange at the lowest prices

18. What are criticisms of a market economy?
Lack of competition
Externalities
Lack of public goods
Income inequality

19. What is a mixed economy?
An economic system that answers the What, How, and For Whom questions through a mixture of traditional, command, and market systems

20. What is capitalism?
An economic system characterized by private ownership of resources and markets

21. What is consumer sovereignty?
The freedom of consumers to cast their dollar votes to buy, or not to buy, at prices determined in competitive markets

22. What is communism?
A stateless, classless economic system in which all the factors of production are owned by the workers and people share in production according to their needs

23. Who was Karl Marx?
His criticism of capitalism advanced communism

24. What is socialism?
An economic system characterized by government ownership of resources and centralized decision making

25. What are the characteristics of socialism?
Public ownership
Centralization

26. What are the strengths of socialism?
An equitable distribution of income
Rapid growth is possible
No unemployment

27. What are the weaknesses of socialism?
Inefficiencies occur
Absence of entrepreneurship stifles growth

28. A Classification of Economic Systems
China, former Soviet Union
U.S., Canada, Western Europe
Cuba
Pure socialism
Pure capitalism
Mexico, Latin America, Japan
France, Sweden, Israel
Hong Kong

29. Key Concepts

30. Key Concepts What is an economic system?
What are the basic types of economic systems?
What is a traditional economy?
What is a command economy?
What is a market economy?
Who was Adam Smith?

31. Key Concepts cont. What is the invisible hand?
What is a mixed economy?
What is capitalism?
What is communism?
Who was Karl Marx?
What is socialism?

32. Summary

33. An economic system is the set of established procedures by which a society answers the What, How and For Whom to produce question.

34. Three basic types of economic systems are the traditional, command, and market systems.

35. The traditional system is based on decisions made according to custom, and the command system answers the three economic questions through some powerful central authority.

36. In contrast, the market system uses the impersonal mechanism of the interaction of buyers and sellers through markets to answer the What, How, and For Whom questions.

37. The Command Economy Pyramid Supreme planning agency
Specialized planning agencies
Producing units
Consuming units

38. Capitalism is an economic system in which the factors of production are privately owned and economic choices are made by consumers and firms in markets. As prescribed by Adam Smith, there is an extremely limited role for government, and self-interest is the driving force, held in check, or regulated, by competition.

39. Consumer sovereignty is the determination by consumers of the types and quantities of products that are produced in an economy.

40. Socialism is an economic system in which the government owns the factors of production. The central authorities make the myriad of society’s economic decisions according to a national plan. The collective good, or public interest, is the intended guiding force behind the central planners’ decisions.

41. Communism is an economic system envisioned by Karl Marx to be an ideal society in which the workers own all the factors of production. Marx believed that workers who worked hard would be public spirited and would voluntarily redistribute income to those who are less productive. Such a communist nation described by Marx does not exist.

42. END