Econ Unit 2: Economic Systems, Factors of production, and Supply and Demand Curves

factors of production

land, labor, capital, entrepreneurship

Traditional Economic System

-based on kinship, custom, and religion.

-Goods are produced commensurably with the needs of the local populace, thus surplus and profits are limited

Traditional Economic System Pro's and Cons

Pros: simple division of work, minimal wastage, earth friendly, socially satisfied populace

Cons: Money in the hands of few, limited progress, low cap on profits, limited access to medicine

Command Economic System

state decides what and how much will be produced and orders state-owned enterprises to meet specific quotas

Command Economic System Pro's and Cons

Pros: affordably priced capital goods, jobs for everyone, plans are easily rolled out less inequality

Cons: Inefficient procedures, prone to abuse, inferior products, uneven distribution of commodities

Market Economic System

the control and direction of financial and other recourses lie preponderantly with entrepreneurs, enterprises, and executives

Market Economic System Pro's and Con's

Pros: constant innovation, economic growth, responsive to public demand, fosters economic activity

Cons: inequality of wealth, high risk, hard to enter high paying jobs, environmental damage

Socialism

centrally planned with some degree of state or social control of production

-extreme forms= gov controls the output and prices of goods and services

Free Market/Laissez-Faire/Pure Capitalism

-based on supply and demand with little or no government control

-focused on the concept of voluntary exchange, which is defined as any transaction in which two parties freely trade goods or services

Communism

a political and economic ideology that positions itself in opposition to liberal democracy and capitalism. It advocates for a classes system in which the means of production are owned communally and private property is nonexistent or severely curtailed

Marxism

Examines the historical effects of capitalism in labor, productivity, and economic development, and argues that a worker revolution is needed to replace capitalism with a communist system

Capitalism

-private companies and individuals own property/goods

-market determines prices

-determined by supply and demand

Characteristics of Capitalism

-Two Class System: Capitalist (bourgeoise) and Working Class (proletariat)

-Specialization

-Private Ownership/Property

-Self Interest

-Competition: Monopolies

Adam Smith

Wrote the "Wealth of Nations"

Main Beliefs:

-No need for gov. involvement in an economy

-Advocate for free markets, guided by the "invisible hand" of self interest

John Maynard Keynes

Wrote "The General Theory of Employment, Interest, and Money"

Main Beliefs:

-Gov has a role to play in the economy, particularly when demand faltered

Karl Marx

Wrote "Das Kapital" and "The Communist Manifesto"

Predicted capitalism would destroy itself

-Capitalism exploits workers due to:

1. Chaotic free market competition

2. Extraction of surplus labor

-Increased inequality due to capitalism will result in violent revolution

The Law of Supply and Demand

Describes how changes in price of a recourse, commodity or product affects its supply + demand

Law of Supply

Direct Relationship

Higher price= higher supply

Law of Demand

Direct Relationship and Higher price=lower demand

Supply Curves

Illustrates correlation between the cost of a product/service and the quantity that is available

Demand Curves

Illustrates the relationship between a good/service + quantity demand for a period of time

Equilibrium Price

Demand matches supply, producing a market equilibrium that is acceptable to buyers and sellers

Giffen and Veblen Goods

Giffen: low priced/ inferior goods

Veblen: Luxury goods that gain value

Demand Elasticity

measurement of change in consumption of a product in relation to its price

Factors Affecting Supply

When goods cost more to produce than they charge. # of sellers, production, capacity, and competition

Factors Affecting Demand

Consumer income, preferences, price, substitute availability

Individual Demand Curve

a curve that examines the price quantity relationship for an individual consumer or how much of a product an individual will buy given a particular price

Market Demand Curve

a summation of the individual demand curves in a given market