Economic Systems NEXT Introduction to Economic Systems Chapter

Economic Systems NEXT

Introduction to Economic Systems Chapter 2: Economic Systems • An economic system is the way in which a society uses its resources to satisfy its people’s unlimited wants. It answers the 3 economic questions. NEXT

Introduction to Economic Systems Types of Economic Systems • Two basic systems: command, and market economies • The other: Mixed economies have features of more than one type of system NEXT

Types of Economic Systems TYPE 1: Command Economy • • • government makes economic decisions – determines what to produce; how to produce; who gets products Wants of individual consumers rarely considered Government owns means of production: resources and factories NEXT

Types of Economic Systems TYPE 2: 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 selfinterest NEXT

Reviewing Key Concepts Use each of the terms in a sentence: • command economy • market economy NEXT

Command Economies Government Controls • Command economy—central government makes all decisions • Decides for whom to produce in part by setting wages – only some people have money to buy available products NEXT

Government Controls: Command Economy 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 EX: Some say President Obama is moving towards a Socialist society Democratic socialism est. under a democratic political process govt owns basic industries, other industries private, central planners make decisions for government-owned industries, central planners might control other sectors, such as health care NEXT

Command Economies Today • No pure command economies today because modern telecommunications has brought about change • Some economies still have mostly command elements, such as North Korea, Cuba NEXT

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

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 NEXT

Reviewing Key Concepts Write a brief paragraph explaining the links between the following three terms: • centrally planned economy • socialism • communism NEXT

Market Economies Fundamentals of a Market Economy • Private property rights—right to own businesses & resources • Property means material objects, money, intellectual property, labor • Market—place or situation where people buy & sell goods & services NEXT

Fundamentals of a Market Economy Private Property & Markets • Private property rights must be defined and protected by law • Buyers must be sure sellers have right to sell products they offer • Sellers must be sure they will be paid for their products NEXT

Fundamentals of a Market Economy 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 NEXT

Fundamentals of a Market Economy Voluntary Exchange in Markets • Voluntary exchange—traders believe they get more than they give up • In market economy, most trade is exchange of product for money • Profit—financial gain from business transaction NEXT

Fundamentals of a Market Economy Competition & Consumer Sovereignty • • • Competition—sellers’ efforts to get business by offering best deal 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 NEXT

Fundamentals of a Market Economy Specialization & Markets • Specialization—people concentrate their efforts in the activities they do best – encourages efficient use of resources – leads to higher-quality, lower-priced products NEXT

Circular Flow in Market Economies Circular flow model illustrates how interactions occur in a market economy between the 2 key decision makers: households, businesses NEXT

Circular Flow in Market Economies Product Markets • Product market—market where goods and services bought and sold – includes all purchases by individuals from businesses NEXT

Circular Flow in Market Economies Factor Markets • • Factor market—market for the factors of production – land, labor, capital, entrepreneurship Individuals own all factors of production – own some outright, such as labor; some indirectly, such as stocks – individuals are producers; businesses are customers NEXT

Impact of Market Economies • Late 1940 s to early 1990 s, many countries had command systems – U. S. S. R. , Eastern Europe, China, much of SE Asia, Cuba, North Korea • Most of these countries have now adopted market systems – remaining communist countries using some market measures NEXT

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

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 NEXT

Reviewing Key Concepts Explain the relationship between the terms in each of these pairs: • • private property rights and market laissez faire and capitalism specialization and profit factor market and product market NEXT

Modern Economies in a Global Age Today’s Mixed Economies KEY CONCEPTS • • Mixed economy has elements of traditional, command, market systems – most common type of economic system Traditional, command, market economies adopt elements from others NEXT

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 NEXT

Today’s Mixed Economies Types of Mixed Economies • Most economies emphasize one type; U. S. basically has market system • Many 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 NEXT

Trends in Modern Economies KEY CONCEPTS • Economies change in response to natural, social, political changes • East European economies changed after fall of communism NEXT

Trends in Modern Economies TREND 1: Changes in Ownership • Economies in transition often go through changes in ownership • To nationalize is to change from private to government ownership • To privatize is to change from government to private ownership NEXT

Trends in Modern Economies TREND 2: Increasing Global Ties • Growth of global economy—economic actions across national boundaries – recent agreements open up world markets to trade among countries – fast, safe, cheap transport of resources, products eases distribution – phone, computer links make financial transactions quick, inexpensive – cross-border business partnerships lower research, production costs NEXT

Reviewing Key Concepts Write a sentence that illustrates the meaning of each of the following terms: • • mixed economy Nationalize Privatize global economy NEXT

Case Study: Contrasting Economies: North Korea and South Korea Background • • • Korea was a single country until end of World War II North Korea has communist government, command economy South Korea is democracy with market economy What’s the Issue? • How effective are command market economies? Thinking Economically 1. Based on documents A and C, in which country does the government appear to be more involved in controlling business and the economy? 2. Based on documents A and C, what can you infer about the effects of government activities on productivity in the two nations? 3. In today’s global economy, is a command economy or a market economy more likely to succeed? Support your answer with information presented in the three documents. NEXT