Transcript Economics Chapter 2 Economic Systems Next Copyright © by Houghton Mifflin Harcourt Publishing Company.

Economics
Chapter 2
Economic Systems
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Economics
Chapter 2
Chapter 2: Economic Systems
KEY CONCEPT
• An economic system is the way in which a society uses its resources to satisfy its people’s
unlimited wants.
WHY THE CONCEPT MATTERS
• An economic system determines what to produce, how to produce, and for whom to
produce. Countries have mixed systems, but some systems give more economic and
political freedom and create more wealth than others.
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Economics
Chapter 2
Section-1
Introduction to Economic Systems
Types of Economic Systems
KEY CONCEPTS
• Economic system — desires that can be met by consuming products
• Three basic systems: traditional, command, and market economies
• Mixed economies have features of more than one type of system
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Economics
Chapter 2
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
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Economics
Chapter 2
Types of Economic Systems
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: resources and factories
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Economics
Chapter 2
Types of Economic Systems
TYPE 3: Market Economy
• 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 self-interest
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Economics
Chapter 2
Characteristics of Traditional Economies
KEY CONCEPTS
• Early societies all had traditional economies
• Traditional systems help societies survive
• Tend to be inefficient; do not adapt to change
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Economics
Chapter 2
Characteristics of Traditional Economies
TRAIT 1: Advantages and Disadvantages
• Advantages: little disagreement over goals, roles
— methods of production, distribution determined by custom
• Disadvantages: as result of resistance to change, less productive
— do not use new methods; people not in jobs they are best suited for
— low productivity results in low standard of living
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Economics
Chapter 2
Characteristics of Traditional Economies
TRAIT 2: Under Pressure to Change
• Many traditional economies under pressure to change
• Kavango people of Namibia lived as subsistence farmers for centuries
• Modern telecommunications brought Kavango images of outside world
— thousands have moved to cities
— a few have turned to commercial farming
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Economics
Chapter 2
Reviewing Key Concepts
Use each of the terms in a sentence:
• traditional economy
• command economy
• market economy
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Economics
Chapter 2
Section-2
Command Economies
Government Controls
KEY CONCEPTS
• Centrally planned 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
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Economics
Chapter 2
Government Controls
EXAMPLE: Government Planning
• 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 is employed, work hours, pay scales
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Economics
Chapter 2
Government Controls
EXAMPLE: 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
• Authoritarian system requires total obedience to government
— communism is authoritarian socialism
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Economics
Chapter 2
Government Controls
EXAMPLE: Socialism and Communism
• Democratic socialism established under democratic political process
— government owns basic industries
— other industries private
— central planners make decisions for government-owned industries
— central planners might control other sectors, such as health care
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Economics
Chapter 2
Karl Marx: Economic Revolutionary
A New View of Economics
• 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
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Economics
Chapter 2
Command Economies Today
KEY CONCEPTS
• No pure command economies today
— modern telecommunications bringing about change
• Some economies still have mostly command elements
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Economics
Chapter 2
Command Economies Today
North Korea
• Communist North Korea used resources for military, not necessities
— built large army; nuclear weapons program
— In 1990s and early 2000s, millions died of hunger, malnutrition
— In 1990s, production decreased and economy shrank
— Since 2003, some market activity allowed
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Economics
Chapter 2
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
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Economics
Chapter 2
Reviewing Key Concepts
Write a brief paragraph explaining the links between the following three terms:
• centrally planned economy
• socialism
• communism
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Economics
Chapter 2
Section-3
Market Economies
Fundamentals of a Market Economy
KEY CONCEPTS
• Private property rights—right to own businesses and resources
• Property means material objects, money, intellectual property, labor
• Market—place or situation where people buy and sell goods, services
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Economics
Chapter 2
Fundamentals of a Market Economy
FEATURE 1: 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
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Economics
Chapter 2
Fundamentals of a Market Economy
FEATURE 2: 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
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Economics
Chapter 2
Fundamentals of a Market Economy
FEATURE 3: 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
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Economics
Chapter 2
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
• Competition controls self-interested behavior
— sellers offer low price or high value to please consumers, make profit
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Economics
Chapter 2
Fundamentals of a Market Economy
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
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Economics
Chapter 2
Circular Flow in Market Economies
KEY CONCEPTS
• Circular flow model illustrates how interactions occur in a market
• Represents the two key decision makers: households, businesses
• Shows the two markets where households and businesses meet
— goods and services
— resources
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Economics
Chapter 2
Circular Flow in Market Economies
Product Markets
• Product market—market where goods and services bought and sold
— includes all purchases by individuals from businesses
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Economics
Chapter 2
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
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Economics
Chapter 2
Circular Flow in Market Economies
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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Economics
Chapter 2
Circular Flow in Market Economies
KEY CONCEPTS
• Late 1940s to early 1990s, 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
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Economics
Chapter 2
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
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Economics
Chapter 2
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
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Economics
Chapter 2
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
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Economics
Chapter 2
Section-4
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
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Economics
Chapter 2
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
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Economics
Chapter 2
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
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Economics
Chapter 2
Trends in Modern Economies
KEY CONCEPTS
• Economies change in response to natural, social, political changes
• East European economies changed after fall of communism
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Economics
Chapter 2
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
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Economics
Chapter 2
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
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Economics
Chapter 2
Reviewing Key Concepts
Write a sentence that illustrates the meaning of each of the following terms:
•
•
•
•
mixed economy
Nationalize
Privatize
global economy
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Economics
Chapter 2
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 and 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.
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Economics
Chapter 2
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