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Economics Unit 2economic systems
Essential Question:
•What are the advantages and disadvantages of the different economic systems used by countries to answer the 3 basic economic questions to meet a standard of living for its population?
Essential Terms/Concepts •Trade-Off•Opportunity Cost•Cost-Benefit Analysis •Standard of living •Traditional Economy •Command Economy•Market Economy
•Mixed Economy •Economic freedom•Voluntary exchange•Private Property Rights•Profit Motive•Competition
Standard of Living- quality of life based on our needs and wants. What should everyone have?
• For America-
Cost Benefit Analysis-Evaluate alternatives • Trade-Off- alternative
choices when ever an economic decision is made.
•Opportunity Cost- the cost of the next best alternative use of money, time, or resources.
Traditional
• -An economic system where tradition and custom govern economic decisions • -Economic activities are usually centered toward the family, tribe, or
ethnic group • -Resources are allocated based on inheritance • -Farming, hunting, and gathering are done largely in the same fashion
as the generation before • -Choices are determined by environment • -Little or no use of technology
Traditional Economy- Not many left Advantages • Little uncertainty of how
to answer the 3 economic questions. •What?- Your family farms
you farm. They hunt to hunt•How?- Just like Dad• Whom?- determined by
customs and traditions
Disadvantages •Discourages new ideas
and new ways of doing things• Lack of progress and very
constricting • lower standard of living
Command
• -The government or other central authority makes all economic decisions • -Individuals have little, if any, influence over economic functions • -Resources are owned by the government • -There is no competition; the purpose of business is to provide goods
and services, not to make a profit • -Factories are concerned with quotas • -Consumers have few, if any, choices in the market place • -The government sets the prices of goods and services
Command “Communist "economies- Few left Cuba, North Korea Advantages • Can focus its factors of production quickly
because all major decisions are centralized. • Typically many public services such as
education and health-care available to the majority of the people. Quality varies • -Serves people collectively instead of
individuals; focus on equality • -Distributes wealth among all of society • -Products produces fulfill needs
Disadvantages • Not designed to meet the wants
of consumers• No or little incentive to be
productive because all receive similar wages.• Little or no innovation• -Often there is insufficient
resource distribution, ie. Shortages and/or surpluses
What changes is Cuba making to their economy?• Have allowed trade with some foreign countries• Have allowed the use of the dollar• Have allowed small “State” controlled markets to open up.
What have been the positive outcomes in Cuba?
The United Emirates- Command Economy?
Market Economy
• -Economic decisions are made by individuals competing to earn profits based on supply and demand • -Resources are owned by individuals • -Profit, not quotas, is the motive for increasing work • -Competition determines price and increases the quality of products • -Individual freedom is considered very important; individuals have
freedom to make economic decisions • -Also called “capitalist” economy
Market EconomiesAdvantages • -Prices determine by market forces
(supply and demand); competition brings down prices • -Consumers can buy whatever they
like in whatever amounts they want • -Adjusts to change easily • -Little government intervention • -Great variety of goods and
services • -Capital flows to where
Disadvantages • Does not always provide basic
needs of everyone in society, which can lead people to slip into poverty • -May make it difficult for
government to provide adequate social services • -There are occasionally market
failures • -People can make choices which are
harmful to themselves and to others
Mixed Economy
• -Combines elements of pure market and command economies; Government and individuals share the economic decision making process • -Government guides and regulates production of goods and services • -Resources are owned by individuals • -Government serves to protect both producers and consumers from
unfair policies and practices
Mixed economy
Advantages• *See advantages of command
and market economic systems • -Can focuses on social welfare
and political freedom, as well as individual liberties
Disadvantages • *See disadvantages of command
and market economic systems • -May not lead to optimal use of
resources • -Government intervention can
hinder progress
Comparative Economic Systems
• 1. How can the presence or Scarcity of natural resources and arable land affect a nation’s economy, regardless of the type of economic system?
• 2. How can life expectancy and literacy rates affect the quality of a countries Human Resources in the economy?
• 3. How can fertility rates affect the use of scarce resources?
• 4. How can GDP per capita and poverty rates indicate standards of living in each system?
• 5. How can the size of the industrial/service sector and the agriculture employment rate indicate the level of industrialization?
• 6. How can electricity, communication, and transportation facilities indicate the potential for industrial growth?
• 7. Considering the lack of natural resources, the labor problems, and the lack of capital and little industrialization of developing countries, how can developing countries develop? (Hint: Look at Economy - Overview for Chad).
• 8. Now that you have studied the economic characteristics of these three countries, define the terms market-oriented, command, and developing economy in your own words. For each term, describe the specific characteristics of the countries you studied that would help to support your definition.