Unit 2 Economic Systems Different methods can be used to allocate goods and services. People, acting individually or collectively through government, must choose which methods to use to allocate different kinds of goods and services. People respond predictably to positive and negative incentives.
Economic systems • Economic system is organization of how a society uses it’s scarce resources to satisfy its unlimited wants • Framework of laws, rules written & unwritten which provide incentives & influence behavior • “Rules to the game of life” not the board game
Comparison of Economic Systems Traditional Command Market Role of technology Economic decisions made by: Customs, past actions Community owned Government & Central Planners Public ownership ~ society Businesses & Individuals Supply & Demand Private owner ~ individual Farming methods Ownership: Incentive for success/Behavior Reward staying in society/survival Bhv: Repeat past actions Reward better job, housing, power elite Bhv: Do what your told Reward $$$$ Bhv: Wise choices Hand tools; No technology Human & animal power No machines Technology used Tractors & gas/oil power Machines Technology used Tractors & gas/oil power Machines Advantages Strong sense of community Everyone is “valued” Little stress about future Prioritize projects Zero unemployment “Free” day care, educ,housing Relative equality Strong motivation for work Efficient use of resources Lots of economic freedom Consumers Disadvantages Inefficient production Survival mode Little leisure time Little flexibility/individuality Large bureaucracy Lack of effective incentives Consumers Uneven distribution of wealth/income ~ poverty Market failures Uncertainty; business cycle Examples Amish community Ant colony in Bug’s Life Former USSR Cuba North Korea United States Japan Germany
Economic Goals • economic freedom ~ right to accept/reject a job open/close a business • economic equity (justice) ~ relatively equal distribution of wealth, small gap between rich & poor • economic stability ~ prices relatively constant, no inflation, no recession, depression • economic efficiency ~ best use of resources, increase profit by making products cheaper • economic security ~ safety net for those unable to work, elderly, unemployed • economic growth ~ increase standard of living by making more stuff, increasing GDP
Economic SpectrumEach nation is unique mixture of command & market elements. Command Market All nations are mixed economic systems.
economic system Organization of how a society uses it’s scarce resources to satisfy it’s unlimited wants. (Framework of laws written and unwritten) traditional economic system 3 basic economic questions answered by actions ofpast generations or customs. command economic system 3 basic economic questions answered by decisions of government or central planners. market economic system 3 basic economic questions answered by decisions of individuals or businesses. mixed economic system 3 basic economic questions answered through a combination of command, market, and traditional decisions. All nations are mixed economies. dynamic Constantly changing, shifting, moving. Economic systems are dynamic because of world events, change in government leaders, society’s values, or technology economic spectrum Economic decision-making is a range between command and market systems. Each nation is a unique combination of command & market systems. Unit 2 Review
standard of living The quantity and quality of goods and services available to an individual or society. nationalized or nationalization The transformation of privately owned business into public ownership. privatized or privatization The transformation of publicly owned business into a privately owned one. socialism Economic system in which the means of production are owned by the government and resources are distributed thru central planning. Command economic system capitalism An economic system in which the means of production are owned by individuals and businesses and resources are privately owned. Market economic system private property Ability of an individual to own and exercise control over scarce resources. Unit 2 Review
eminent domain The right of government to acquire private property for public use by paying fair market value. consumer sovereignty The freedom of buyers to choose which goods and services to buy. profit motive The desire of businesses to earn greatest amount of money. Incentive for business free enterprise The freedom of business to make decisions to earn maximum dollars. competition The rivalry among businesses for consumer dollars. Unit 2 Review
economic goals Desirable economic targets for policymakers which will benefit society. economic freedom Open/close business, pick job, spend or save $ Wise choices of businesses & individuals. economic efficiency Wise use of resources, no idle resources or waste. Maximum production of resources. economic equity Distribution of income/wealth. Poverty and gap between the rich and poor. economic growth The increase in production of goods and services over time; Measured by GDP or GDP/capita. Increased economic growth leads to an increasing standard of living. economic stability Stable prices (low inflation) and full employment (low unemployment) economic security Financial safety net for young, old, disabled, unemployed, and sick. Unit 2 Review