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Chapter 2 Notes. Every economy must answer 3 important questions: What goods and services should be produced? How should goods and services be produced? Who consumes Goods and services?. Chapter 2 Notes. Chapter 2 Notes. 4 Types of Economies: Traditional Economy- small, villages
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Chapter 2 Notes Every economy must answer 3 important questions: What goods and services should be produced? How should goods and services be produced? Who consumes Goods and services?
Chapter 2 Notes 4 Types of Economies: • Traditional Economy- small, villages • Market Economy- free markets, capitalism • Command Economy- communism, not free • Mixed Economy- small government role.
Chapter 2 Notes Why do markets exist? Because very few of us are self-sufficient. That is why we mostly specialize. We are more efficient when use specialization. What type of economy answers the 3 questions? Free Market Economy
Chapter 2 Notes In a Free Market Economy individuals answer the 3 questions… these are their answers: • Individuals and private businesses own the factors of production • Make what they want • Buy what they want It all works between households and firms in a Product Market and a Factor market diagram.
Chapter 2 Notes How does this work so well? Self-interest Competition Self interest is the motivating force behind the free market, competition is the regulating force.
Chapter 2 Notes Adam Smith- Scottish philosopher who published a book called The Wealth of Nations. In his book, he described how competition and self-interest controlled a phenomenon called “the invisible hand” of the marketplace. The overall result is that consumers get the products they want at the prices that closely reflect the cost of producing them.
Chapter 2 Notes In a centrally planned market (Command Economy), the central government answers the 3 questions. The government owns the land and the capital. And owns the labor in a way because they control where individuals work and what they are paid. Words associated with centrally planned economies are: socialism and communism
Chapter 2 Notes Socialism- a social and political philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout society. It does exist in communist countries, but can exist in some varying degrees in democratic or capitalistic nations. Socialism is used in Communism.
Chapter 2 Notes Communism- a political system characterized by a centrally planned economy with all economic and political power resting in the hands of the government. While socialist economies can still allow for democracy, communist governments are authoritarian (dictatorship).
Poor Quality Serious Shortages of non-priority goods Diminishing production Cannot meet consumers’ needs or wants No reward for innovation Sacrifice individual freedoms for societal goals Chapter 2 NotesProblems with centrally planned economies:
Chapter 2 Notes Most economies of today are a Mixed Economy. Adam Smith believed in laissez faire, the doctrine that government should not intervene in the marketplace. Some needs that the market could meet, fall to the government so that all members of society can participate. Example: Education, Health Care, Mass Transit
Chapter 2 Notes A major factor in the economy is the government’s protection of property. By giving society the opportunity to have private property, the elements of self-interest, incentive, and competition can drive the economy toward more wealth for one, but more importantly…for the entire nation. What are you willing to give up? Are you willing to pay taxes to fund an Army? To give all people an education?
Chapter 2 Notes In a Circular flow model of a mixed economy: • Government is in the factor market by employing over 2.8 million employees and paying them $9.7 billion a year for their labor. • Government is in the product market by providing 4 million miles of roads for the US citizens to use.
