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Economic Systems Economic Systems • Survival for any society depends on its ability to provide food, clothing, & shelter for its people • The economic system is the organized way a society provides for the wants & needs of its people • Basic questions: What to produce? How to produce? For whom to produce? • 3 types of economies: traditional, command/central, & market Traditional Economy • Economic activity is based on ritual, habit, & custom • Strengths • Everyone knows their role • Little uncertainty over what or how to produce • “For whom to produce?” is answered by custom • Life is generally stable, predictable, & continuous • Weaknesses • Tends to discourage new ideas • Lack of progress leads to lower standard of living Command/Central Economy • Central authority makes most economic decisions; people expected to go along with these decisions • Strength • Can drastically change direction in relatively short time • Ex) USSR transitioned from agrarian to industrial very quickly • Weaknesses • Large bureaucracy for economic planning • Not designed to meet wants & needs of individuals • Lack of incentives to work hard; leads to unexpected results • Inflexible in dealing with minor, daily problems • New, unique ideas stifled Market Economy • People & firms act in their own best interest to answer economic questions • Markets allow buyers & sellers to come together to exchange goods & services • Strengths • Decentralized decision making • Markets can adjust over time • Freedom exists for those involved • Relatively small degree of government influence • Variety of goods & services produced • High consumer satisfaction Market Economy • Weaknesses • Primary weakness is deciding “For whom to produce?” • Young, sick, & old would have difficulty in a pure market environment • Markets sometimes fail • Competition (monopolies may develop) • Resource mobility (resources are sometimes hindered from moving about) • Availability of information (producers often have more information than consumers, giving them advantage) Modern Examples • • • • United States Inuit in Northern Canada The rest of Canada North Korea Modern Examples • • • • United States: Market Inuit in Northern Canada: Traditional The rest of Canada: Market North Korea: Command/Central More Examples More Examples Command/Central Market Command/Central Traditional Market Need more info Capitalism & Free Enterprise Capitalism & Free Enterprise • Capitalism: a system in which people own their own labor & the property, equipment, & other resources to make money • Characteristics of a Free Enterprise Economy • Economic freedom • Voluntary exchange • Private property & freedom to enter into contracts • Profit motive Characteristics of a Free Enterprise Economy • Economic freedom • You are free to choose your job, choose where and when you work, work for yourself or someone else, leave your job & to move to another job • Businesses are free to choose which workers they want, figure out how much business they want to do • Voluntary exchange • People & businesses want to do business with each other; they aren’t forced • When people & businesses do business, they are made better off Characteristics of a Free Enterprise Economy • Private property & freedom to enter into contracts • People have the right to do what they want with their own property • Private property gives people the motivation to work hard, save money, & invest • Private property motivates people to get ahead in life • Contracts are agreements made between people to buy & sell • Contracts can be written or spoken, but either way we are legally bound to keep our agreements Characteristics of a Free Enterprise Economy • Profit Motive • People are free to risk what they already own to make more money • The chance at becoming rich makes many people become entrepreneurs • Profit: how much better off a person or business is after a period of time • Profit Motive: the force that makes people and businesses want to get more money Roles of Entrepreneurs and Consumers • Role of the entrepreneur • Brings together people, resources & equipment to make a profit • Motivate the economy by generating new ideas & methods of doing things • Because of the money that entrepreneurs make, this makes other people want to go into business & compete, making everyone better off • Role of the consumer • We, the consumers, rule the free enterprise economy. • Our choices decide what is made, bought and sold in the economy. • CONSUMER SOVEREIGNTY Roles of the Government • Protector • Makes & enforces laws against false advertising, unclean food & medicine, pollution, unsafe products, etc. • Enforces contracts & laws against workplace discrimination • Provider & Consumer • Provides products & services that business don’t – schools, roads, military, welfare, etc. • Buys things from businesses – fighter jets, aircraft carriers, submarines, tanks, etc. • Regulator • Establishes rules for businesses to follow • Ex) Decides which frequency radio stations can broadcast on; creates rules for running nuclear power plants Mixed Economy • Combines elements of a market economy with elements of a command economy • Because the government plays a part in the US economy, we are not a true free market economy • Instead, we are called a modified free enterprise economy