Chapter 2:2.1, 2.2, 2.3,2.4.

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ECONOMIC SYSTEMS

Done by :…

EconomicsDate:…Ms./Mr

An Economic system is the way in which society uses its resources to satisfy its people.

22.1

Definition:

Figure (1)

Three basic economic questions:1.What to produce?2.How to produce?3.For whom to produce? Figure (2)

3

THREE BASIC TYPES OF THE ECONOMIC

SYSTEM:1) Traditional Economy2)Command Economy3)Market Economy

• Mixed Economies have features of more than one type of system.

Figure (3)

2.1

42.1

Traditional Economy

• Decisions are based on a societies values, customs and traditions.

• Tradition decides what you produce. If your family has always caught fish, your family will most likely always catch fish. Roles are usually passed down from father to son and mother to daughter.

• Good of the group always come before individual desires.

• Traditional economies still exist in parts of N. America, Asia, Africa, San of the Kalahari Desert and the Aborigines of Australia.

Figure (4)

Advantages

Little disagreement over goals, roles.

- Methods of production, distribution determined by custom.

Disadvantages

As a result of resistance to change, less productive.

- Do not use new methods; people not in they jobs they are best suited for.

- Low productivity results in low standard of living.

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TRADITIONAL ECONOMY2.1

62.1

COMMAND ECONOMY• The government has complete control over production.• Individuals in a command economy have little or no

say in economic choices.• Government owns means of production on: resources

and factories.• North Korea and Cuba are current examples of

command economies. Before the collapse of communism in Europe, countries such as the Soviet Union, Poland, and East Germany also were command economies.

• It is also called Planned Economy.

Figure (5)

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.

72.1

Market Economy

Figure(6)

82.1

Under pressure to change:• Many traditional economies under

pressure to change.• Kavango people of Namibia as subsistence

farmers for centuries.• Modern telecommunication brought

Kavango images of the outside world.- Thousands moved to cities.- A few have turned to commercial farming.

Centrally planned economy- central government makes all decisions.

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GOVERNMENT PLANNING:

2.2 Command Economies

Definition:

• In all societies government exerts some control over people’s lives.

• In centrally planned economy, government exerts great control.

-Determines businesses to operate, amount produced each month.-Determines who employed, work hours, pay scales.

Karl Marx infl uenced some societies to adopt command economies.

-Socialism: government owns some of the factors of production.-Communism: no private property, little political freedom. Authoritarian: system requires total obedience to

government.-Communism is authoritarian socialism. Democratic socialism established under democratic

political process.-Government basic industries.-Other industries private.-Central planners make decisions for government owned industries.-Central planners might control other sectors, such as health care.

102.2

Socialism and Communism:

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Karl Marx: Economic Revolutionary

2.2

A New view of Economics: Marx lived during industrial revolution.

Argued factory owners used workers as resources-Exploited workers by keeping waged low to increase profits.-Workers would rebel, established classless society. Wrote The Communist Manifesto (with Friendrich

Engles). Das Kapital.

Figure(7)

North Korea:

122.2 COMMAND

ECONOMIES TODAY

Communist North Korea used resources for military, no necessities.

- Built large army; nuclear weapons program.- In 1990s and early 2000s, millions died of

hunger, malnutrition. 1990s, production decreased and economy

shrank. Sine 2003, some market activity allowed.

Figure (8)

Figure (9)

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Impact of command

Economies:

2.2

Theory- command systems fair to everyone; but in practice – many disadvantages.

- Central planners do not understand local conditions.

- Workers have little motive to be productive or conserve resources.

- Artificially how prices lead to shortages.- People sacrificed to carry out centrally

planned policies.

142.3 Market Economies

Fundamentals of Market Economy• Private property rights– right to own business and

resources.• Property means material objects, money, intellectual

property, labor.• Market– place or situations where people buy and sell goods,

services.Private property and 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.

o Laissez faire—government should not interfere in economy.

o Capitalism—system having private ownership of factors of production.

-Says producers will create products consumers demand.o Actual market economies all have some government

involvement.

152.3

Limited Government Involvement:

Voluntary Exchange in Markets:o Voluntary exchange—traders believe they get

more than they give up.o In market economy, most trade is exchange of

product for money.o Profit– financial gain from business transaction.

162.3

Competition and 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. 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.

12Circular Flow in Market Economies:

2.3

Product Markets:• Product Markets– markets where goods and services bought

and sold.- Includes all purchases by individuals from businesses.

Factor Markets:• Factor Markets– 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.- Individual are producers; businesses are customers.

Circular Flow:• Circular flow model shows how market economies

operate.- Outside arrow shows flow of money.- Inside arrow shows flow of resources and products.

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THE CIRCULAR FLOW MODEL

2.3

Figure(10)

Its shows the exchanges between the flow of resources and the flow of payments.

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.

Profi t motive ensures resources used effi ciently, reward hard work.

- Resulting competition leads to higher-quality, more diverse products.

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..

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IMPACT OF MARKET ECONOMIES

2.3

• Mixed economy has elements of traditional, command, market systems.

- Most common type of economic system.• Traditional, command, market economies adopt elements from

others.

202.4 Modern Economies in Global Age

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.

Types of Mixed Economies:• Most economies emphasize one type; U.S. basically has market

system.• Many European countries greater nix 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.

• Economies change in response to natural, social, political changes.• East European economies changed after fall of communism.

212.4

Trends in Modern Economies

Change 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.

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 partnership lower research, production costs.

Figure(11)

People’s needs and wants may confl ict, priorities can confl ict, solutions can confl ict and priorities can change.

To fix this, the nation will depict what economic goals are more important, then assign which goal they will plan to meet fi rst.

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WHY DO ECONOMIC GOALS SOMETIMES CONFLICT?

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Resources:Information:• Holt Economies concepts and choices book.• ClassZone.com

Figures:• Figure (1):http://www.brandeberry.net/ • Figure(2):lerner.udel.edu• Figure(3):home.comcast.net• Figure(4):felena.edu.glogster.com• Figure(5):avuc92.wordpress.com• Figure(6):worldculturepictorial.com• Figure(7):fineartamerica.com• figure(8):1x1.fi• figure(9):komonews.com• Figure(10):justdan93.wordpress.com• Figure(11):globalhajemohammadi.blogspot.com

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