Chapter 2 Economic Systems and Decision Making How

Chapter 2 Economic Systems and Decision Making How do economic systems help society deal with the fundamental economic problem of scarcity?

There are 3 main types of economies. - Traditional - Command - Market

Traditional Economy: Economic activity based on ritual, habit, & custom. a. Strengths: 1. everyone knows their role & life is stable & predictable 2. Little uncertainty over the what, how, & for whom questions b. Weaknesses: 1. discourages new ideas 2. lack of progress leads to lower standard of living.

Amazon Shaman

Tanzanian Hunters/Farmers

Face Painting – Papua New Guinea

Command Economy: Central authority makes most economic decisions. The government answers WHAT, HOW, and FOR WHOM. a. b. Strengths: 1. Can change direction drastically in short time. Weaknesses: 1. Not designed to meet needs & wants of individuals. 2. large bureaucracy for economic planning 3. Not flexible in dealing with everyday issues 4. Stifles new ideas

Former USSR

Conan O'Brien's visit to Cuba - Even Though Cuba is a Command Economy, they are in transition to being more market oriented. They are trying to model themselves after the Chinese.

Soviet Peasants on a collective farm. Priority is placed on the group, rather than on individuals. Without the freedom of choice, Bill Gates might have been a farmer.

Socialism An economic and political system where the government owns some, but NOT all the factors of production. This could be classified as a form of Mixed or Command Economy.

Market Economy: Market Economy - People & firms act in own best interest in search of profits to answer the economic questions WHAT, HOW, and FOR WHOM. A. Strengths: 1. Markets can adjust over time 2. Relatively small government interference 3. decentralized decision making 4. High variety/quality of products 5. High consumer satisfaction

B. Weaknesses: 1. Main one is deciding for whom to produce 2. The young, sick, & old have difficult time in pure market system. 3. Markets sometimes fail - Competition (or lack thereof) - resource mobility - availability of information Capitalism – An economic system where private citizens own the factors of production.

As communist countries and socialist countries collapsed, they have transitioned towards capitalism. This can be seen through many Eastern European countries that were once part of the Soviet Union. These include Hungary, Bulgaria, Romania, East Germany (now just Germany), Czechoslovakia (now Slovakia and Czech Republic), and Poland. Privatization – Government property converted to private property.

Unfortunately these transitions are not always easy. Often there are power vacuums that take advantage of Black Markets to profit and obtain power. Black Market – Illegal sale of goods and services through unregulated markets.

Communism According to Karl Marx (the founder of communism), the ideal economy would divide all property equally amongst its citizens. All citizens would contribute and benefit according to their needs. In essence, a government would no longer be needed.

Mixed Economy When an economy is a combination of either traditional, market, or command economies.

GDP and GDP per Capita GDP is how we measure economic growth. It is based on the dollar value of goods sold in an economy. GDP per capita is based on how we divide that economic growth person.

GDP per Capita in the US • In the U. S. we have typically seen a GDP per capita rate increase.

GDP per capita growth rate in India • While GDP in India is expanding rapidly, GDP per capita is going down. Why is this phenomenon occurring?