Chapter 29 Comparative Economic Systems Key Concepts Summary

Chapter 29 Comparative Economic Systems • Key Concepts • Summary • Practice Quiz • Internet Exercises © 2002 South-Western College Publishing 1

What is an economic system? The organization and methods used to determine what goods and services are produced, how they are produced, and for whom they are produced 2

What are the basic types of economic systems? • Traditional • Command • Market 3

What is a traditional economy? A system that answers the What, How, and For Whom questions the way they always have been answered 4

What is the benefit of a traditional economy? There is little friction among members because relatively little is disputed 5

What are the disadvantages of a traditional economy? Restricts individual initiative Lack of advanced goods, new technology, and growth 6

What is a command economy? A system that answers the What, How, and For Whom questions by central authority 7

What is the structure of a command economy? It has a pyramid structure 8

The Command Economy Pyramid Supreme planning agency Specialized planning agencies Producing units Consuming units 9

What are the strengths of a command economy? Economic change can occur very quickly Social welfare can be enhanced 10

What are the weaknesses of a command economy? Decision makers have the power to be absolutely wrong Quality and variety of goods suffer 11

Price per side mirror (rubles) Central Planners Fixing Prices $80 S Shortage of 400 thousand side mirrors $60 $40 $20 Price set by planners E D 200 400 600 800 1000 Quantity of side mirrors (thousands per day) 12

Shortage of mirrors Planners set the price of mirrors below equilibrium 13

What is a market economy? An economic system that answers the What, How, and For Whom questions using prices determined by the interaction of the forces of supply and demand 14

Who was Adam Smith? The father of modern economics who believed that a free market economy acted like an “invisible hand” 15

What is the invisible hand? A phrase that expresses the belief that the best interests of a society are served when individual consumers and producers compete to achieve their own private interests 16

What is the advantage of a market economy? It provides a wide variety of goods and services that buyers and sellers exchange at the lowest prices 17

What are criticisms of a market economy? • Lack of competition • Externalities • Lack of public goods • Income inequality 18

What is a mixed economy? An economic system that answers the What, How, and For Whom questions through a mixture of traditional, command, and market systems 19

What is capitalism? An economic system characterized by private ownership of resources and markets 20

What is consumer sovereignty? The freedom of consumers to cast their dollar votes to buy, or not to buy, at prices determined in competitive markets 21

What is communism? A stateless, classless economic system in which all the factors of production are owned by the workers and people share in production according to their needs 22

Who was Karl Marx? His criticism of capitalism advanced communism 23

What is socialism? An economic system characterized by government ownership of resources and centralized decision making 24

What are the characteristics of socialism? Public ownership Centralization 25

What are the strengths of socialism? • An equitable distribution of income • Rapid growth is possible • No unemployment 26

What are the weaknesses of socialism? Inefficiencies occur Absence of entrepreneurship stifles growth 27

A Classification of Economic Systems Cuba China, former Soviet Union Pure socialism U. S. , Canada, Western Europe Pure capitalism France, Mexico, Latin Sweden, Israel America, Japan Hong Kong 28

Key Concepts 29

Key Concepts • What is an economic system? • What are the basic types of economic systems? • What is a traditional economy? • What is a command economy? • What is a market economy? • Who was Adam Smith? 30

Key Concepts cont. • • • What is the invisible hand? What is a mixed economy? What is capitalism? What is communism? Who was Karl Marx? What is socialism? 31

Summary 32

An economic system is the set of established procedures by which a society answers the What, How and For Whom to produce question. 33

Three basic types of economic systems are the traditional, command, and market systems. 34

The traditional system is based on decisions made according to custom, and the command system answers the three economic questions through some powerful central authority. 35

In contrast, the market system uses the impersonal mechanism of the interaction of buyers and sellers through markets to answer the What, How, and For Whom questions. 36

The Command Economy Pyramid Supreme planning agency Specialized planning agencies Producing units Consuming units 37

Capitalism is an economic system in which the factors of production are privately owned and economic choices are made by consumers and firms in markets. As prescribed by Adam Smith, there is an extremely limited role for government, and self-interest is the driving force, held in check, or regulated, by competition. 38

Consumer sovereignty is the determination by consumers of the types and quantities of products that are produced in an economy. 39

Socialism is an economic system in which the government owns the factors of production. The central authorities make the myriad of society’s economic decisions according to a national plan. The collective good, or public interest, is the intended guiding force behind the central planners’ decisions. 40

Communism is an economic system envisioned by Karl Marx to be an ideal society in which the workers own all the factors of production. Marx believed that workers who worked hard would be public spirited and would voluntarily redistribute income to those who are less productive. Such a communist nation described by Marx does not exist. 41

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