econ chapter 2 test

traditional economy

traditional economy

one in which the questions of scarcity are answered by historical tradition and societal customs

advantages of a traditional economy

a. everyone has a role in society

b.     no homelessness (extended families)

c.     no unemployment

d.     life is very stable

disadvantages of a traditional economy

a.     discourages new ideas

b.     grows stagnant over time

c.     cannot continue if the economy grows too complex

command economy

one in which the economic decisions for the society are made by a central authority (government)

advantages of a command economy

a.     Government can shift production quickly

b.     Ideally, all in society will be provided with necessities.

disadvantages of a command economy

a.     Reverse style incentives

b.     No profit motives (no copyrights or patents)

c.     Lack of choice in consumer goods

d.     Big bureaucracy needed to make decisions (inefficiency)

e.     Misuse or waste of resources (corruption)

examples of command economies

Former Soviet Republics and Eastern European countries

Cuba, China, North Korea

market economy

one in which economic decisions are made by individual consumers in the marketplace

characteristics of a market economy

a.     Prices reflect supply and demand

b.     Millions of individual decisions send signals to the producers     who respond to the three questions

c.     Example:  United States

advantages of market economies

a.     Flexibility

b.     Ability to change over time

c.     Profit incentives promote economic growth and new technology

d.     Economic Freedom for all involved

disadvantages of market economies

a.     Rewards go to only those with productive resources (Land, Labor,  Capital, Entrepreneurship)

b.     Social Programs must be instituted to assist those without resources (elderly – Social Security, Medicare)

mixed economies

economic systems in which part of the economy is directed by consumers and market forces, and part of the economy is directed by the government

examples of mixed economies

Sweden, Canada, Great Britain

capitalism

An economic system based on the private ownership of property and the accumulation of capital

characteristics of capitalism

Private Ownership

1)   Spreads economic power among many people

2)   Economic progress through profit incentives

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Market Economy

1)   Forces of Supply and Demand regulate prices

2)   Economic and Political freedom coexist

3)   Consumers send signals to producers

Competition

1)   Beneficial to the consumer

2)   Lower prices, new improvements, better efficiency,

better quality

Stable Prices

Profits and Losses

changes to capitalism

a.     Rise of Corporations

b.     Rise of the Service Industry

c.     Continued pressure toward a more mixed economy.

d.     Welfare State

1)   Originates during the Great Depression (1930s)

2)   FDR and the New Deal (3 R’s)

• Social Security, Medicare, Medicaid, Low Income Housing, Food Stamps, Welfare, Workman’s Comp, Unemployment Comp, etc….

Adam Smith

• Scottish Philosopher and Economist

• Wealth of Nations, 1776

• “Father of Capitalism

The Wealth of Nations

• Invisible Hand

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• Pursuit of Self Interest

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• Benefits for Others

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• Profit Motive

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• Need for Governments

socialism

An economic system in which all members of society work for the good of the society, and all members benefit equally

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Karl Marx

• “Communist Manifesto”

• Socialism

communism

• originally based on the writings of Karl Marx (Father of Communism) in his 1848 work,                The Communist Manifesto

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Marxists divided into two factions:

Socialists

Bolshevists

failure of soviet communism

Human nature – greed, corruption, competition

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No incentives / Perverse incentives

Society was too big and geographically divided to maintain equality

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Failure of the government to provide for the needs of the people (food, goods, services, etc.)

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demise of the soviet union

Mikhail Gorbachev becomes Secretary-General of the Communist Party

Reforms:

Glasnost (openness)

Perestroika (restructuring)

December 1991 – Soviet Union ends

Russian President – Boris Yeltsin, then Vladimir Putin

Currently – Dimitry Medvedev

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russian communism

• The Bolsheviks, led by Vladimir Lenin, overthrown the Russian monarchy (1917)

• The Soviet Union is established as a communist dictatorship

• Characteristics of Russian Communism

  • Begins with violent Revolution

  • Maintained through military dictatorship