Unit 1: Fundamental Concepts. Types of Economic Systems. Types of Economic Systems

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1 Unit 1: Fundamental Concepts 1-2 Economic Systems 1 Ch. 2 Types of Economic Systems An economic system is the way in which a society uses its resources to satisfy its people s unlimited wants. An economic system determines: what to produce how to produce for whom to produce 2 Ch. 2 Sec. 1 Types of Economic Systems TYPE 1: Traditional Economy Traditional economy centers on families, clans, or tribes decisions are based on customs and beliefs Everyone has a set role; no chance of deviating from pattern Good of the group always comes before individual desires TYPE 2: Command Economy 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 3 Ch. 2 Sec. 1 1

2 Types of Economic Systems TYPE 3: Market Economy Market economy driven by choices of consumers and producers Consumers, producers benefit each other when they act in self-interest 4 Ch. 2 Sec. 1 Government Controls Centrally planned economy government makes all decisions Central government exerts great control determines businesses to operate, amount produced each month determines who is employed, work hours, pay scales 5 Ch. 2 Sec. 2 Government Controls Karl Marx influenced some societies to adopt command economies Marx lived during Industrial Revolution Argued factory owners used workers as resource exploited workers by keeping wages low to increase profits workers would rebel, establish classless society Wrote The Communist Manifesto (with Friedrich Engels), Das Kapital 6 Ch. 2 Sec. 2 2

3 Karl Marx Workers of the world unite; you have nothing to lose but your chains. The history of all hitherto existing society is the history of class struggle. The philosophers have only interpreted the world in various ways; the point is to change it. Government Controls Socialism an economic system in which the government owns some or all of the factors of production Authoritarian Socialism economic system in which the government owns all the factors of production and there is little or no political freedom Also called communism Democratic Socialism is established under democratic political process government owns basic industries other industries private central planners make decisions for government-owned industries 8 Ch. 2 Sec. 2 Command Economies Today No pure command economies today Some economies still have mostly command elements 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 are sacrificed to carry out centrally planned policies 9 Ch. 2 Sec. 2 3

4 Fundamentals of a Market Economy Market place or situation where people buy and sell goods, services There are 5 features to a market economy FEATURE 1: Private Property and Markets Property means material objects, money, intellectual property, labor Private property rights right to own businesses and resources Capitalism system having private ownership of factors of production 10 Ch. 2 Sec. 3 Fundamentals of a Market Economy FEATURE 2: Limited Government Involvement Laissez faire government should not interfere in economy FEATURE 3: Voluntary Exchange in Markets Voluntary exchange traders believe they get more than they give up 11 Ch. 2 Sec. 3 Fundamentals of a Market Economy FEATURE 4: Competition and Consumer Sovereignty Competition sellers efforts to get business by offering best deal Consumer sovereignty buyers choose products, control what is produced FEATURE 5: Specialization and Markets Specialization people concentrate their efforts in the activities they do best encourages efficient use of resources leads to higher-quality, lower-priced products 12 Ch. 2 Sec. 3 4

5 Circular Flow in Market Economies Circular flow model illustrates how interactions occur in a market Represents the two key decision makers: households, businesses Product market market where goods and services bought and sold includes all purchases by households from businesses Factor market market for the factors of production land, labor, capital, entrepreneurship Households own factors of production 13 Ch. 2 Sec. 3 Circular Flow Model 14 Impact of Market Economies Advantages Individuals free to make economic choices, pursue own work interests Locally made decisions mean better use of resources Profit motive ensures resources used efficiently, rewards hard work Disadvantages no way to provide public goods and services w/o government Does not give security 15 Ch. 2 Sec. 3 5

6 Today s Mixed Economies Mixed economy has elements of traditional, command, market systems Most economies emphasize one type; U.S. basically has market system Many European countries greater mix of market and command elements 16 Ch. 2 Sec. 4 6