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Chapter 2 Economic Systems A. Economy or Economic System – An organized way of providing for the wants and needs of a society. • Three Types of Pure Economic Systems 1.Traditional 2. Command 3. Market B. Traditional Economy • Based on custom and tradition • answers to the 3 economic questions are found in the past • Children often carry on roles of their parents as hunters or farmers • Drawbacks: new ideas are discouraged and often punished • Ex. Canadian Inuits C. Command Economy • Government officials answer economic questions. Central planners decide who will receive products and what will be produced. Strengths: can easily change economic direction Weaknesses: they do not always meet the needs of individuals, there is little incentive for individuals to work hard, large bureaucracies often are slow making decisions, are not flexible enough to deal with day to day problems. • Ex. North Korea, Cuba, and the People’s Republic of China. D. Market Economy • Individuals answer the 3 economic questions • Government has no say. Factors of production (resources) are owned by individuals • People can buy, sell, or produce anything they want E. Mixed economies- combine elements of traditional, market, & command economic models. • Authoritarian socialism or communism- closest to command – the government owns or directs nearly all factors of production (Cuba) • Capitalism- economies closest to market • Democratic Socialism- between authoritarian socialism and capitalism. – Gov’t owns some factors of prod. usually key industries like utilities, telephone, etc. Leaders are elected by the people. (Sweden, Poland, France.) Features: F. Capitalism Private individuals own Strengths: resources & choose • Produces more how they are used. w/available resources – Gov’t has limited than others economic power, acts • Provide equality of only to prevent fraud opportunity b/c of strict or others from using property protection rights force, and to protect Drawbacks: does not safety. distribute wealth equally. Despite basic fairness – Exchanges between there will always be producers and discrimination. consumers are voluntary. – (Canada, Mexico, Japan, Taiwan) G. Adam Smith- Philosopher & economist who explained the process of market regulation. • when the government is not involved in the economy that the market is purely driven by selfinterest. • self-interest acts as an “invisible hand” that leads people to do what is best for society • Incentives- can be positive or negative- encourage people to behave in a particular way How does the Free Enterprise System Work? 5 features of the U.S. Free Enterprise System: Individuals can: 1. Own private property and enter into contracts A. Private Property: goods that are owned by individuals and businesses rather than by the government B. Contracts- agreements between individuals to buy and sell goods and services- contracts can be written or oral 2. Make individual choices- laborers, producers and consumers can decide how to satisfy their needs and wants 3.Engage in economic competition – Competition- the economic rivalry that exists between businesses selling the same product. (It encourages producers to make and improve products and lower costs.) 4.Make decisions based on self-interest- profit motive – Profit- the extent to which persons or organizations are better off at the end of a period then they were at the beginning – Profit motive- the driving force that encourages people and organizations to improve their material well being 5. Participate in the economy with limited government involvement and regulation How would a traditional system, a command system and a market system differ in the way they would emphasize or not emphasize the following broad social goals of society. Traditional 1. Economic Equity 2. Economic Security 3. Economic Growth 4. Economic efficiency 5. Environmental Protection Command Market • Circular Flow Model • What economic concept does the circular flow model show? 1. Household- individual or family unit that occupy a single home & have common living expenses. a. What do they exchange with businesses? they receive income in exchange for labor in the form of a wage. • As consumers, households make expenditures to businesses for which they receive goods and services. b.What do they pay to the government? households pay taxes. 1st Period c.What do they get from the government? they receive public goods and services, low income households receive transfer payments. • Transfer payments redistribute wealth through programs like welfare. 2. Businesses/Firms-individuals work together to produce a good or service. a. What do businesses exchange with households? From households-get labor for which they pay wages- are consumers & producers b.What do businesses exchange with the government? pay taxes and get subsidies c. What is a subsidy? a payment to a business firm that cannot profit on its own. May be given b/c the firm is vital to nat’l security, or significant for the country, or essential for economic health. 3. Government- limited role in the US. a.How does the government get income? Takes in money for taxes (income, property, user fees, tariffs, sales taxes) b.What are government expenditures? Transfer payments and subsidies and providing public goods and services. c.What is a public good? It is not able to be depleted and cannot be easily denied to people b/c of non-payment like roadways. Markets in the Circular Flow Model • What is the factors (Resource) market? • The market for resources like land, labor, capital to be used in production. • What is the products market? • Where goods are sold for consumption by end-users. 1. Distinguish between product and factor markets. 2. Using the information you have learned, write a paragraph on "you as a labor unit." What do you have to offer to the factor market that will help you get what you want out of life? How, specifically, can you increase your value in the factor market 1) Businesses provide the government with A. taxes and goods and services. B. taxes and labor. C. services and income 2) Businesses receive _____ and ____ from the government. A. taxes and goods and services B. services and payments C. taxes and labor 3) Households provide businesses with A. labor and payments. B. services and income. C. taxes and goods and services. 4) Businesses provide households with A. taxes and income. B. labor and payments. C. income and goods and services • Using the information learned so far, write a paragraph on "you as a labor unit." What do you have to offer to the factor market that will help you get what you want out of life? How, specifically, can you increase your value in the factor market? 2.3 The U.S. Economy at Work Should the U.S. government provide health-care coverage to all U.S. citizens? Why or why not? What are some of the benefits and trade-offs of the U.S. government providing health coverage to all citizens? U.S. Economic Goals 1. Freedom 2. Efficiency- making the best use of scarce resources 3. Equity- policymakers try to ensure that all members of society share in cost and benefits of the free-enterprise system 4.Security- nation tries to protect members from anything that might harm their economic well being such as poverty, business and bank failures, or medical emergencies 5. Stability: has two main goals: • Full employment- lowest possible level of unemployment in the economy • Price stability- when the overall price of goods and services available in the economy is relatively constant (this refers to the prices of all goods taken together, not of any one product) 6. Growth- efforts to increase the amount of goods and services produced by each worker in the economy. (If production per worker decreases then there will be a decline in the nation’s standard of living. ) • Standard of living- measures people’s economic well being- is measured by how much the average person in a country is able to consume in a year.