economic systems - bethel social...

Economic Systems

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.

Types of Economic Systems

KEY CONCEPTS

Economic system—how society uses

resources to satisfy people’s wants

Three basic systems: traditional, command,

and market economies

Mixed economies have features of more

than one type of system

Introduction to 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:

resources and factories


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

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


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


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

Reviewing Key Concepts

Use each of the terms in a sentence:

traditional economy

command economy

market economy

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

Command Economies

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

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

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

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

Command Economies Today

KEY CONCEPTS

No pure command economies today

modern telecommunications bringing about change

Some economies still have mostly command elements


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


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


Write a brief paragraph explaining the links between

the following three terms:

centrally planned economy

socialism

communism

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

Market Economies

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


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


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


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


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

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


Product Markets

Product market—market where goods and services

bought and sold

includes all purchases by individuals from businesses


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


Circular Flow

Circular flow model shows how market economies

operate

outside arrow shows flow of money

inside arrow shows flow of resources and products

Impact of 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


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


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


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

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

Modern Economies in a 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 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

Trends in Modern Economies

KEY CONCEPTS

Economies change in response to natural, social,

political changes

East European economies changed after fall of

communism


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


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


Write a sentence that illustrates the meaning of

each of the following terms:

mixed economy

Nationalize

Privatize

global economy

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.

economic systems - bethel social...

Documents