Economic Systems

1. Chapter 2 Economic Systems

2. Types of Economic Systems • Economic system: • how society uses resources to satisfy people’s wants • Three basic systems: • Traditional • Command • market economies

3. Types of Economic Systems • Traditional Economy • centers on families, clans, or tribes • decisions are based on customs and beliefs • Good of the group always comes before individual desires

4. Characteristics of Traditional Economies • Advantages and Disadvantages • Advantages: little disagreement over goals, roles • methods of production, distribution determined by custom • Disadvantages: as result of resistance to change, less productive • do not use new methods; people not in jobs they are best suited for • low productivity results in low standard of living

5. Types of Economic Systems cont. • Command Economy • (centrally planned economy) government makes economic decisions • determines what to produce; how to produce; who gets products • determines who is employed, work hours, pay scales • Wants of individual consumers rarely considered • Government owns means of production: resources and factories

6. Government Controls • EXAMPLE: Socialism and Communism • Karl Marx influenced some societies to adopt command economies • socialism—government owns some of the factors of production • communism—no private property; little political freedom • Authoritarian system requires total obedience to government • communism is authoritarian socialism

7. Karl Marx: Economic Revolutionary • A New View of Economics • Marx lived during Industrial Revolution • Argued factory owners used workers as resource • exploited workers by keeping wages low to increase profits • workers would rebel, establish classless society • Wrote The Communist Manifesto (with Friedrich Engels), Das Kapital

8. Government Controls • Socialism and Communism • Democratic socialism established under democratic political process • government owns basic industries • other industries private • central planners make decisions for government-owned industries • central planners might control other sectors, such as health care

9. Command Economies Today No pure command economies today • modern telecommunications bringing about change • Some economies still have mostly command elements

10. Command Economies Today • North Korea • Communist North Korea used resources for military, not necessities • built large army; nuclear weapons program • In 1990s and early 2000s, millions died of hunger, malnutrition • In 1990s, production decreased and economy shrank • Since 2003, some market activity allowed

11. Command Economies Today • Impact of Command Economies • In theory, command systems fair to everyone; In practice, many disadvantages • central planners do not understand local conditions • workers have little motivation to be productive or conserve resources • artificially low prices lead to shortages • people sacrificed to carry out centrally planned policies

12. Types of Economic Systems cont. • Market Economy • driven by choices of consumers and producers • consumers spend money, go into business, sell their labor as they wish • producers decide how to use their resources to make the most money • Consumers, producers benefit each other when they act in self-interest

13. Fundamentals of a Market Economy • 1: Private Property and Markets • 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

14. Fundamentals of a Market Economy • 3: Voluntary Exchange in Markets • Voluntary exchange—traders believe they get more than they give up • 4: Competition and Consumer Sovereignty • 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

15. Fundamentals of a Market Economy • 5: 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

16. 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

17. Circular Flow in Market Economies • Factor Markets • Factor market—market for the factors of production • land, labor, capital, entrepreneurship • Product Markets • Product market—market where goods and services bought and sold • includes all purchases by individuals from businesses • Circular flow model shows how market economies operate

18. Teal- flow of resources and products Green- Flow of $$

19. Impact of Market Economies • Advantages • Individuals free to make economic choices, pursue own work interests • Less government control means political freedom • 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

20. Impact of Market Economies • 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

21. Today’s 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

22. 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

23. Today’s Mixed Economies • Types of Mixed Economies • U.S. basically has market system • 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

24. Trends in Modern Economies • Changes in Ownership • Nationalize is to change from private to government ownership • Privatize is to change from government to private ownership