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Chapter 2 Economic Systems
Sections 3 & 4
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Fundamental of a Market Economy
Market Economies Fundamental of a 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
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Fundamentals of a Market Economy
FEATURE 1: 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 FEATURE 2: 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 FEATURE 3: 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
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Fundamentals of a Market Economy
FEATURE 4: 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 FEATURE 5: Specialization and Markets Specialization people concentrate their efforts in the activities they do best encourages efficient use of resourced leads to higher-quality, lower-priced products
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Circular Flow in Market Economies
KEY CONCEPTS 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
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Circular Flow in Market Economies
Product Markets Product market—market where goods and services bought and sold includes all purchases by individuals from businesses 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 Circular Flow Circular flow model shows how market economies operate outside arrow shows flow of money inside arrow shows flow of resources and products
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Circular Flow in Market Economies
KEY CONCEPTS Late 1940s to early 1990s, many countries had command systems U.S.S.R., Eastern Europe, China, much of SE Asia, Cuba, North Korea Most of these countries have now adopted market systems remaining communist countries using some market measures
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Impact of Market Economies
Advantages 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 Disadvantages 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
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Modern Economies in a Global Age
Section-4 Today’s Mixed Economies KEY CONCEPTS Mixed economy has elements of traditional, command, market systems most common type of economic system Traditional, command, market economies adopt elements from others
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Today’s Mixed Economies
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
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Today’s Mixed Economies
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
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Trends in Modern Economies
KEY CONCEPTS Economies change in response to natural, social, political changes East European economies changed after fall of communism
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Trends in Modern Economies
TREND 1: 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 Ties TREND 2: Increasing Global 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
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