Download Economics Systems

Notes: Chapter 2- Economic Systems
I.
Three Economic Questions
A. What goods and services should be produced?
1.
Limited resources
2.
Ex: guns vs. butter
B. How should goods and services be produced?
1.
Ex: large or small firms
2.
Man ways the factors of production can be compared
C. Who consumes the goods and services?
1.
Factor payments: income people receive for supplying factors of
production
II.
Economic Goals and Societal Values
A. Economic efficiency
B. Economic freedom
C. Economic security and predictability
1.
Safety net
a. Government programs that protect people experiencing
unfavorable economic conditions
b. Ex: welfare and disability
2.
The government will not allow the economy to suffer inflation
D. Economic equality- what is fair?
E. Economic growth and innovation
1.
Standard of living
a. Level of economic prosperity
b. How well people live
c. Ex: the United States vs. Mexico
2.
Improved efficiency = economic growth
III.
Types of Economies
A. Economic system: method used by a society to produce and distribute goods
and services
B. Traditional economy
1.
Based on habit, custom, or ritual to decide economic questions
2.
Typically have a low standard of living, are stagnant, and resist
change
3.
Kids tend to grow up doing jobs their parents did
4.
Ex: tribal societies
C. Market economy
1.
Economic questions are based on voluntary exchange in markets
2.
Ex: the United States
D. Command economy
1.
The government makes the economic decisions
2.
Also know as centrally planned economies
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3.
Ex: the Soviet Union and North Korea
E. Mixed economies
1.
Market-based economic system with limited government
involvement
2.
Ex: Great Britain
IV.
The Free Market
A. Market
1.
Arrangement that allows buyers and sellers to exchange goods and
services
2.
Important because no one is self-sufficient
B. Specialization
1.
Concentration of productive efforts of individuals and firms on a
limited number of activities
2.
Usually leads to efficiency
3.
Ex: I don’t teach math or English
C. Characteristics of free market economy
1.
Privately-owned businesses
2.
Voluntary exchange of goods and services
3.
Profit motive: financial gain made in a transaction
D. Circular flow model
INSERT DIAGRAM!!!
1.
Household
a. People living together (consumers)
b. Own the factors of production
2.
Firm
a. Produces a product (business)
b. Turn factors to outputs (things to sell)
3.
Factor market: firms purchase factors of production from
households
4.
Product market: households purchase goods and services that firms
produce
E. How the marketplace works
1.
Self-interest: doing what’s best for one’s personal gains
2.
Incentive: an expectation that encourages people to behave in a
certain way
3.
Competition: struggle among producers for consumers’ businesses
a. Leads to better products and lower prices
b. Ex: PS3 vs. XBox360 vs. Nintendo Wii
F. Invisible hand
1.
The self-regulating aspect of the market
2.
If consumers are happy then producers are happy; and vice versa
3.
Adam Smith- The Wealth of Nations (1776)
G. Advantages of the free market
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1.
2.
3.
4.
Economic efficiency
Economic freedom
Economic growth
Consumer sovereignty
a. Power of consumers to decide what is produced
b. The consumer is the real winner in a free market economy
H. True pure market economies do not exist
V.
Command Economies
A. Government agencies make the decisions for what is produced, for how much
and what price
1.
The government controls the factors of production
2.
No consumer sovereignty
B. Socialism
1.
Social and political philosophy based on the belief democratic
means should be used to evenly distribute wealth
2.
Ex: there may be elections but the government owns the utilities
C. Communism
1.
Centrally planned economy with all economic and political power
in the hands of the central government
2.
Karl Marx and Friedrich Engels wrote The Communist Manifesto
(1848)
3.
More authoritarian than socialism
4.
Ex: the Soviet Union, China, and North Korea
D. Flaws of command economies
1.
Poor quality of goods
a. Ex: East German car doors often did not properly fit
2.
Shortage of consumer goods
3.
Few incentives to work hard
4.
Little innovation
5.
No individual freedom
6.
The economy is too complex for the economy to run
VI.
The Case of the Soviet Union
A. Russian Revolution (1917)
1.
Tsar Nicholas II  Vladimir Lenin and the Bolsheviks
(Communists) took over
2.
Stalin took over for Lenin and established an extremely
authoritarian regime
B. Soviet agriculture
1.
State-run farms called collectives
2.
Ironic that despite having lots of good land the Soviet Union was
unable to feed itself late in its existence
C. Soviet industry
1.
Emphasis on heavy industry (ex: steel, heavy machinery
manufacturing)
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2.
Little emphasis on innovation
D. Soviet consumers
1.
Consumer goods were scarce and poor quality
2.
Few luxuries except for upper-level Communist Party members
3.
Not unusual for Soviet citizens to wait in line for hours for basic
goods like toilet paper
E. Fall of the Soviet Union
1.
The Soviet Union collapsed in 1991
2.
Today Russia is making the transition to capitalism and a free
market economy
3.
Privatization: the conversion of state-owned businesses to
privately-owned businesses
VII.
Mixed Economies
A. Laissez-faire
1.
Doctrine that government should not intervene in the market
2.
Adam Smith and The Wealth of Nations (1776)
3.
Limits of laissez-faire
a. For some goods and services it is best for government to
provide services
a. National defense
b. Public transportation and highways
c. Education?
b. Monopolies tend to emerge
a. Ex: trusts of the late 1800s such as Standard Oil
c. Consumer protection is needed
d. The world is too complex today for no government regulation
B. What should be the government’s role in economy?
C. See model – page 42- circular flow model of a mixed economy
VIII.
Comparative Economies
A. Continuum: range with no clear divisions
B. INSERT DIAGRAM
C. Privatization: selling state-run firms to individuals
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