Download Study Guide – Economic Systems

Study Guide – Economic Systems
Economic Systems – method used by a society to produce and distribute goods and
services.
a. The primary role of an economic system is to determine the allocation of
limited resources.
b. The function is to produce and distribute goods and services.
Basic Economic Questions (only first three on district test)
1. What goods and services should be produced?
2. How should these goods and services be produced?
3. Who consumes these goods and services?
4. What will be saved for later?
Markets allow people to buy what they need to consume and sell specialized goods and
services they produce.
Types and characteristics of Economic systems:
1. Traditional Economy:
a. uses habit, ritual or custom to answer the basic economic questions
b. revolves around the family
c. resistant to change at both individual and community level
d. low standard of living
e. agricultural and hunting practices are often main economic activities
f. little if nothing saved for later
2. Market Economy
a. use the buying and selling of goods to answer the economic questions.
b. Specialization leads to the need to purchase the things we want.
c. No country today has a market economy
d. invisible hand (Adam Smith) through competition and people acting in
their own self interest the consumer will be able to get the products they
want at a price that closely reflects the cost of producing them. As if an
invisible hand made it happen. (Invisible hand is the self-regulating
nature of the market place.)
 Self-interest is the motivating force behind a free market.
 Free markets need some government regulation to ensure 2 things: -that
businesses act fairly and - provide for things that the marketplace does
not address.
Advantages of a market economy:
a. Economic efficiency – because it is self regulating it is responsive to
changing conditions. Producers make only what consumers want and at
a price consumers are willing to pay.
b. Economic Freedom – freedom for workers, consumers and producers
c. Economic Growth – Entrepreneurs are always looking for profitable
opportunities so they pursue new ideas and products.
d. Consumer sovereignty – consumers decide what will be produced
because the producer will only produce those items that the consumer
will buy.
e. It offers a wide variety of goods and services.
Disadvantages of a market economy
a. Concern for the old/young disadvantaged of the society.
b. Profit motive can lead some producers to create substandard products
c. Stiff competition can lead to businesses going bankrupt
3. Command Economy
a. also called Centrally planed economy
b. The government answers the economic questions by owning both the
land and capital and in effect the labor by determining where
individuals work and what they are paid.
c. No country today has a command economy
d. Uses posters for propaganda to get workers motivated
Advantages of command economy
a. ability to switch resources quickly to new products (ie from consumer to
military)
b. Each person has a job
c. Government provides all the basic needs for all citizens
Disadvantages of Command Economy
a. no incentive for workers ( No innovation) Government posters –
propaganda
b. generally can not meet consumer demands and is slow to respond to
consumer needs and wants.
c. Does not reward innovation
4. Mixed Economy
a. All countries today have a mixed economy
b. The economic questions are decided through a combination of the
buying and selling of goods within government regulations.
c. The amount of government regulation varies greatly by country (ie
Hong Kong very little/North Korea great controls)
 In a mixed society were the market governs the day to day economic life
while the government regulates social conditions and provides health
care, this is commonly known as a welfare state.
Characteristics of the American Economy:
1. Property rights
a. Individuals own the factors of production
b. Guaranteed in the 5th and 14th amendments
2. Profit motive
a. force that encourages people and organizations to improve their material wellbeing. Incentive of manufacturers.
b. rewards innovation by letting creative companies grow
c. improves productivity by allowing more efficient companies to make more
money. Financial gain.
3. Consumer sovereignty
a. consumers decide what will be produced because the producer will only
produce those items that the consumer will buy.
4. Competition
a. To attract customers a producer must lower prices and improve quality or
consumers will go to another producer to purchase the product. This
interaction between consumer and producer regulates the market (purpose).
5. Self-Interest
a. people worry about their own well being when they are involved in market
activities. You have the opportunity to become rich or to lose money when you
become a business owner. Self interest is the motivating force in a free market.
6. Role of Government
a. Constitutional responsibilities to protect property rights, contracts, and other
business activities in our free enterprise system.
b. Make sure consumers have access to information on products
c. Protection of social problems of pollution and unsafe foods
d. Safety net for disadvantaged and protection from unforeseen situations (is
unemployment insurance and disability payments)
7. Specialization
a. Concentration of the productive efforts on a limited number of activities.
It makes the economy more efficient.