Chapter 2 ECONOMIC SYSTEMS

Section 1

Introduction to Economic Systems

Types of Economic Systems An economic system is a way a society uses it’s scarce resources to satisfy

it’s people’s unlimited wants.

There are 3 basic types of economic systems:

Traditional Economy

This type of economy is based on customs and beliefs that have been handed down from generation to generation. The main goal of these societies is survival.

Command Economy

The Government decides which goods and services will be produced, how they will be produced, and who will produce them.

They do not take into consideration the wants of the consumers

This is a Communist society

Market Economy

This type is based on individual choice, not government directives.

Consumers and producers drive the economy.

This is the type of economy we have in the United States.

Characteristics of Traditional Economies

In the early days ALL societies had traditional economies but most have changed since then

There are clear advantages and disadvantages to a traditional economy

It clearly answer the 3 economic questions as it is setup for survival

People know what is expected and what will be produced there isn’t many surprises

The disadvantages are it resists any type of change and therefor does not grow

People also have a much lower standard of living.

Traditional economies have been under a lot of pressure to change

People grow tired of living day to day with no chance of advancement and comfort in life and begin to push for their country to evolve away from traditional economic ways.

Section 2

Command Economies

Government Controls

A command economy is a Communist type economy where the government plans everything for the people in what is called a central planned economy

Basically the government decides which businesses are allowed to be in what city, what they produce, how much they produce of it, who works to produce it.

There is no choice by the consumer or producer in this type of society

Socialism and Communism

Karl Marx a 19th century philosopher is the reason societies have adopted a command type economy

In this type of economy the industrialists grew rich while the workers remained poor

This was setup for all classes to share wealth

Socialism is an economic system in which the Government owns some or all of the factors of production (originated from Karl Marx)

Communism is an even more extreme version of Socialism where there is no private ownership of property and little to no political freedom

Command Economies Today

North Korea is a command economy they take the majority of their countries resources and divert it to the military boasting a military of over a million soldiers

Because of this millions of North Koreans died due to starvation because the government chose to send those resources to the military instead of to it’s people

Many North Koreans survived due to aide from other countries

Their economy shrunk each year as this type of government did not work

Impact of Command Economies

In theory command economies do have advantages

Everyone is taken care of, they all get equal shares, and the government can use some of the resources to produce items that won’t make money in a market economy

In practice there is more disadvantages though as central planners don’t know the needs of all people, workers have little to no chance of improvement so they lose their desire to improve themselves meaning production goes down and there is no motivation to use natural resources wisely because you don’t have the opportunity to get more if you do.

People in these economies struggle mightily due to the lack of ability to plan for large numbers

Section 3

Market Economies

Fundamentals of a Market Economy

2 key concepts of a market economy are as follows:

Private property rights – the rights of individuals and groups to own property

Market – any place or situation where people buy and sell resources and goods and services.

These 2 concepts are derived from self interest and how to better one’s self interest.

Fundamentals of a Market Economy Private Property and Markets

Private property rights must be well defined and actively enforced by law.

Limited Government Involvement

This is based on private ownership (capitalism) and giving producers and consumers the right to decide what they want

Voluntary Exchange in Markets

This is where buyers and sellers agree to do business together voluntarily.

Competition and Consumer Sovereignty

Where 2 or more people actively engage to try and gain the business of others by providing the best deal which in turn allows the consumer to get a good fair deal on products.

Specialization and Markets

This allows people and businesses to specialize in a product they do best and in turn creates a much more efficient economy

Circular Flow in Market Economies

There are 2 key economic decision makers in a free market economy (Product Markets and Factor Markets) and they are displayed on a Circular Flow Model

Product Markets are the markets for goods and services

Factor Markets are the factors of production (land, labor, capital, and entrepreneurship)

Impact of Market Economies

There are advantages and disadvantages to a Market Economy

Advantages –

Freedom of choice is 1 of the key advantages

This applies economically as well as politically because in this type economy the government does not hold the power to dictate what consumers and producers do

Limited government interference makes it advantageous to people who utilize this type of economic process

Profit is an advantage because people have the ability to gain profit for themselves

Incentive

Disadvantages –

There is no group or public assistance the emphasis is placed on the individual

No security for those who cannot produce for themselves

No Government regulation means more opportunity for corrupt business leaders

Section 4

Modern Economies in a Global Age

Today’s Mixed Economies in a Global Age

A mixed economy is an economy that has characteristics of a traditional, command, and market economy all mixed together.

All modern economies are mixed today but they generally emphasize 1 type of system or another.

The U.S.A. has characteristics of all but is driven mostly by a Market system

In Europe it has more of a mix between mixed and command economies

European governments are much closer to a Socialistic government as opposed to where the U.S. is closer to a market economy.

Trends in Modern Economics

In a transition period economies will a lot of times have a change in ownership of companies.

1 way to do this is through nationalizing companies by transitioning them from private control to government control

Another way is to privatize companies by doing the opposite or going from government control to private control

Trends in Modern Economics

One way you can privatize industry is to open it up to foreign investors which in turn helps to aid the global economy by making more transactions global

This is important because it opens up the world economy for more economic globalization and unity.

This also was made possible because of faster, cheaper, more efficient travel and communication.