economic systems chapter 2 traditional command market
TRANSCRIPT
ECONOMIC SYSTEMSChapter 2
TRADITIONALCOMMAND
MARKET
TRADITIONAL
Allocation of scarce resources by ritual, custom, or habit, e.g. hunter-gatherer societies
An economy in which the basic economic questions are answered by custom & tradition
Individuals not free to make decisions based on what they want
Roles defined by customs of ancestors Economic decisions are based on how they
were made in the past Economy is self-sufficient and mostly make
things necessary to survival
TRADITIONAL
No specialization or division of labor
Producers are their own consumers Bartering, instead of money No real changes in technology Examples: the Amish, Indian
cultures in Central & S America
TRADITIONAL
Strengths:• Everyone has defined
role• Little uncertainty over
how, what, for whom Weaknesses:
• Discourages innovation• Discourages satisfaction
of personal wants; tends to have lower standard of living
COMMAND
Economy controlled by the government Government owns all factors of
production (resources, factories, railroads, etc.)
Economic decisions are made by the central government – at the top & people expected to follow
State can shift resources at will to focus on new priorities
a/k/a CENTRAL PLANNING; characteristic of communist countries
Interdependent: much specialization and division of labor
COMMAND
Examples: former Soviet Union, Cuba, Iraq, early People’s Republic of China
Strengths:• Can change direction very quickly• Planning agencies can shift resources
quickly on a massive scale• Labor shortages solved by forcing
redirection of workers
COMMAND
Weaknesses:• Does not meet needs and wants of individuals• Few consumer goods and very long waits• Little incentive to work – low pay
• (“We pretend to work & they pretend to pay us)”
• People keep jobs for life – no incentive to work hard• Large decision-making bureaucracy – out of touch
and slow• Does not move quickly to solve day to day
problems• Discourages innovation
MARKETECONOMY
Privately-owned capital goods are used to produce all goods and services without significant government intervention
People and companies act in own self interest to answer “What, How, For Whom”• Economics decisions are based on supply & demand• Markets allow buyers & sellers to come together
Entrepreneurs Interdependent: much specialization and
division of labor Highest standard of living a/k/a Capitalism & Free Enterprise
MARKET
Highest production and sale of consumer goods Examples: U.S., Canada, Japan, Great Britain… Strengths:
• Can adjust to change over time – gradual• Change not prohibited or discouraged• Decision making decentralized- resources directed to where
consumers want them• Huge variety of goods and services• Freedom for everyone involved - people decide their own
“What, How, For Whom” with relatively little government interference
MARKET
Weaknesses:• People may be caught without work as the “For
Whom” question is not always clear.• Young and sick may not get support as they are
unproductive• Markets don’t always function optimally – need
competition, resources free to move around, need good market information
• Public goods not naturally provided
U.S. ECONOMYMixed
• A Modified Private Enterprise Economy• Capitalism modified by government
intervention and regulation• So… market mixed with command.
• What is the current mix?• What is the role of the consumer in the
U.S. economy?• Consumer Sovereignty – consumers rule!
• What is the role of government?• Protector, provider & consumer, regulator,
promotes national goals
5 CHARACTERISTICS:• Economic Freedom
• Choices for consumers & businesses
• Voluntary exchange• Buyers & sellers freely exchange in market
transactions
• Private property rights• Profit motive
• Entrepreneurs
• Competition• Only because private individuals own the factors
of production – better goods, lower price
U.S. Economic & Social Goals Used to Evaluate Economic
Performance
1. Economic Freedom – to make your own decisions2. Economic Efficiency – get the most out of the scarce
resources there are—no waste3. Economic Equity – fairness! Equal pay for equal work, no
false advertising, etc.4. Economic Security – disability, retirement, social security5. Full Employment – unemployment equals poor economy6. Price Stability – NO inflation….particularly harsh for those
on “fixed incomes”7. Economic growth – to achieve the “American dream”
Conflicts in Goals
Society evaluates costs and benefits of each to promote one over the other
What goals would be in conflict with a minimum wage increase?
How do you resolve the conflict?• Cost v. benefit analysis• Elect the person to office who agrees with
you