Economic SystemsChapter 2

Scarcity This is a fact of life Three questions

What should be produced? How should it be produced? For whom should it be produced?

An economic system is the way a society uses it scarce resources to satisfy it people’s unlimited wants

Traditional Economy An economic system in which people

produce and distribute goods according to custom handed down from generation to generation Survival – main goal – What? Everyone has a set role – How? Good of the group not individual – Whom?

Command Economy The government will decide what goods

and services will be produced, how it should be produced, and for whom it should be produced.

Individual wants are rarely considered Current - North Korean and Cuba Previous – Soviet Union, Poland, East Germany

Market Economy Is an economic system in which

individual choice and voluntary exchange direct economic decisions (individual choice) Consumer and producer drives the

economy – What? Producer (individual-owned enterprises)

decide – How? Self-interest, who can afford them –

Whom?

Mixed Economy Economic system that incorporates

some governmental involvement into a Market Based Economy Most Modern Economy

Section 1 Assessment Key concept questions 1- 6

Critical Thinking question 9

Group Project In groups, create a poster that shows

the three economic questions and how a traditional, command, and market economy answers each of those questions. Arrange the poster in any way but make sure that it contains at least one illustration for each question for each economies

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Command Economies Members of the central government

Economic decisions Centrally planned economy

Government Control Who What How

Socialism and Communism

Karl Marx Social conflict Industrialist grew richer and workers

remain poor

Socialism – government owns some or all of the factors of production

Communism – no private ownership of property and little or no political freedom

Authoritarian – absolute obedience to those in power

Communism Socialism Market System

Who owns resources?

Government Government owns basic resources, the

rest are privately owned

All resources privately owned

How are resources allocated?

Government planners decide

how resources are used

Government planners allocate basic resources; market forces

allocate privately-owned resources

Market forces

allocate resources

What roles does government play?

Government makes all economic

decisions

Government makes decisions in the basic industries

Governments role

limited-mostly to

ensure market

forces are free to work

Why is government ownership of the means of production necessary to achieve communist goals?

How are the goals of the socialism met by allowing both government ownership and private ownership of resources?

Economic Revolutionary Traveled many

countries Industrial period Wage slavery Social Conflict Rich gets richer,

Poor gets poorer

North Korea Communist control

Every economic decision Nuclear project

Population starvation – scarce of food Other countries provided food aid

Good for the country and less concentration on the people

Impact Government takes care of people Little concern or knowledge of local

conditions No work motivation Shortages - long lines waiting to

supplies No individual rights

Section 2 Assessment Key Concepts questions 1 – 5

Critical Thinking question 8

What advantages and disadvantages did Russians experience with a command economy? With a market economy?

What characteristics of a market economy have contributed to the divide between rich and poor?

Will conditions for the poor likely improve or get worse as market economic factors become more firmly established in Russia? Why?

Market Economy Private Property rights – individuals

have the right to own property, resources, and businesses Property is defined as anything a person

can own Market – any place where people buy

and sell goods and services Exchange private property for someone

else’s

Limited Government Involvement

The idea that the government should have limited interference with business and economy is called laissez faire French meaning: “leaving things alone”

This has the same ideals as capitalism Private ownership – profit

However, the government has some control or involvement

Voluntary Exchange in Markets Voluntary exchange – when the buyer

and seller of a product or service is worth more than what they gave up Desire vs. Profit

Profit is the earning above the amount of original cost

Competition and Consumer Sovereignty

In today market, competition, the effort of two or more people, acting independently, to get the business of others by offering the best deal, is vital. Generics vs. Name Brand

Since the consumer has a choice to purchase what they want, they have the ultimate control of what is produced, Consumer Sovereignty

Specialization, focus on the market or area that they know best, is a key component for businesses

Circular Flow How does the market economy function

Circular Flow Model – economist visualize how the market flows in an economy Households - individual use Businesses Page 53, figure 2.4

Product Market Product Market is the goods and

services

Consumer purchase goods and services Mall, grocery store, department store

Businesses offer the goods and services for sale

Factor Market Businesses purchase the resources they

need to produce goods and services Factor of production

land, Labor Capital Entrepreneurship

Businesses become the customers and the individuals are the producers

Circular Flow Model http://

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Section 3 page 57 Assessment Key Concept questions 1- 5

Critical Thinking question 9

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How has the Constitution shaped the Economic System in the U.S.? Constitutions are economic documents as well

as political documents. This is certainly true of the Constitution of the U.S. Our nation’s founders believed that economic freedom as well as political freedom are essential for national prosperity and growth. Accordingly, they included numerous provisions in the Constitution that support and encourage the operation of a market economy. Thus, as the basic “law of the land,” the U.S. Constitution defines the essential features of our economy.

Activities Characteristics of Market economy Matching Provisions of the U.S.

Constitution with Basic characteristic of Market Economy

Economic provisions in the constitution of the People’s Republic of China

Preamble to the Constitution We the people of the United States, in

order to form a more perfect Union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution of the United States of America.

Modern Economies in a Global Age

Mixed Economy – an economic system that is a combination of a traditional, command, and market economies

Most common in today’s society United States - example

Level of Government Economist use a math calculation to

determine the level or percentage of government involved in an economy.

Page 60, figure 2.5 Share of the economy = Government consumed by consumption Total Economy

Trends in Modern Economies In recent history, many countries have

been changing their type of market in order bust their economy. Nationalize – changing from private

ownership to government or public ownership

Privatize – moving from a government or public ownership to private ownership

Global To encourage privatize ownership, they

should open up their industry to foreign investors Global economy – economic interactions

that cross international boundaries Buy and sell to foreign markets

Market video http://www.learner.org/series/econusa/u

nit01/