Unit 2 economic systems

Economy/Economic system

an organized way of providing for the wants and needs of their people, answers 3 fundamental questions of economics

Traditional economy

the allocation of scarce resources, and nearly all other economic activity, stems from ritual, habit, or custom, ranks religious and cultural values over econ, determines jobs according to ancestors, examples: Inuit and Australian Aborigines

Command economy

one in which a central authority (government) makes most of the WHAT, HOW, and FOR WHOM decisions, 2 types (strong/communism and moderate/socialism)

Market economy

people and firms act in their own best interests to answer the WHAT, HOW, and FOR WHOM questions

Social security

a federal program of disability and retirement benefits that covers most working people

Inflation

a rise in the general level of prices

Fixed income

an income that does not increase even though prices go up

Capitalism

where private citizens (many of whom are entrepreneurs) own the factors of production, little gov. control, encourages private ownership of business and competition in all sectors, examples: USA, Hong Kong, Germany

Free enterprise

economy in which competition is allowed to flourish with minimum of government interference; term used to describe the American economy

Voluntary exchange

act of buyers and sellers freely and willingly engaging in market transaction

5th amendment and Private property rights

the privilege that entitles people to own and control their possession as they wish, ensures households and businesses are protected

Profit

the extent to which persons/organizations are better off at the end of a period than they were at the beginning

Profit motive

driving force that encourages people/organizations to improve their material well-being

Competition

struggle among settlers to attract consumers while lowering costs

Consumer sovereignty

describes the role of consumer as sovereign/ruler of the market

Mixed economy or Modified private enterprise economy

free enterprise market economy where people carry on their economic affairs freely, but are subject to some government intervention and regulation

Strong Command (Communism)

• maintains strong governmental control

• requires 4 factors of production to be owned and operated by the government

• forbids competition

• permits little to no freedom in selecting a career and workplace

• practices heavy taxation

• examples: North Korea, Cuba, People’s Republic of China

Moderate Command (Socialism)

• Medium gov. control

• practices gov. control in key industries such as railroads, utilities, steel, iron, oil

• allows private ownership in only non-vital industries

• examples: Sweden and France

Communism advantages

• allows for large changes to quickly be made

• chooses jobs for everyone

• Including government provided medical and social services

Communism disadvantages

• lacks in meeting consumer needs

• prevents people from making their own economic decisions

Socialism advantages

• allows competition in smaller, private sector

• permits the right to choose career and place of employment

• high taxation

• provides medical care, education and social security benefits,

• allows businesses and individuals to keep some profits for their efforts

Socialism disadvantages

• discourages small business ownership by heavy taxation and diminished income

• controls important business sectors

Capitalism advantages

• allows full freedom to choose career and workplace, moderate taxation

• Countries can specialize in products that they can make efficiently (comparative advantage)

• Adjusts well to change

• High degree of individual freedom

• Small amount of government interference, consumer sovereignty,

• Large variety of goods and services available, High degree of consumer satisfaction

Capitalism disadvantages

• doesn’t provide basic needs of everyone

• marked differences between rich and poor

• uncertainty faced by workers due to change

• can fail if there is no competition, unmobile resources, consumers’ inadequate info

Traditional advantages

• raises everyone to know their role

• supplies sufficient amount of foods to the people

• greatly reduces that amount of surplus or waste that dominates a market economy

Traditional disadvantages

• stifles new ideas, tech and efficiency

• differentiates the economic roles and status of men and woman

Questions to distinguish economies

Degree of gov. control?

Freedoms of people allowed?

Competition allowed? To what degree?

Mixed economy

• almost always influenced by gov.

• gov. makes basic econ. system decisions (defense and justice) while others pay for universal medical and educational needs

• intervene mainly through “regulations”

• have to create laws to protect property and enforce contracts because of capitalism and free enterprise and voluntary exchange

• combines private enterprise while ensuring social warfare

Mixed economy advantages

• Fostered innovation

• Reduced monopoly power

• Improved income equality through safety nets

Mixed economy disadvantages

• Potential for inefficient public sectors and high bureaucracy

• Higher taxes

• Market distortion from excessive regulation

Private enterprise system

• synonymous with Capitalism

• Emphasizes private sector

• Allows ownership of resources and businesses by individuals in society

• Permits individuals, rather than government, to make economic decisions

• Allows individuals to receive benefits and wages from employers

Individuals have high levels of freedom to

• buy desired goods & services

• produce & sell items

• choose any career & workplace

Motivates businesses to succeed by

• Promoting competition

• meeting the wants & needs of customers

• encouraging profits

• promotes entrepreneurship as an important aspect of an economy

Four basic economies the US has experienced

Agricultural, industrial, service, information

Agricultural economy

• The United States was since its birth almost exclusively a farming society.

• The South remained agrarian, relying heavily on cotton, until after the Civil War. The North began a shift.

• By 1800, 95% of the population lived on farms, and agriculture was the primary economic activity, mostly substance farming.

• City life and industrialization began to grow mainly in the North. The Industrial Revolution marked the start of an economic shift out of agriculture.  By 1890 the US had shifted to an industrial power.

Industrial economy

• concerns those activities combining factors of production (facilities, supplies, work, knowledge) to produce material goods intended for the market. The US experienced skyrocketing industry in the mid to late 1800’s.

• People began working in factories

• People fled to cities (1790-1987 agriculture employment declined to 2.9%

• Inventions led to the explosion of the Industrial Revolution in America

Service economy

• Early 1900s

• As standard of living increases→ demand for service increases

• an economy or the sector of an economy that is based on trade in services. The early 1900’s saw a surge in need of services and this was born in the U.S.

• Remains the sector of most jobs today

Information economy

• system where economic value is driven by the production, distribution, and consumption of information, data, knowledge, and technology rather than manufacturing or agriculture. 

• Starting to take shape in the post-WWII era, it became a dominant, measurable economic force by the 1960s-1970s. 

• Today with the dominance of the internet, this is highly prevalent and acts as a primary engine of the U.S. economy.

• encompasses over 28.4 million jobs—spanning digital, tech, and service sectors—and contributes trillions to the GDP.

• Rapid growth in artificial intelligence, digital services, and internet-driven commerce. 

impossible to completely balance

Many of the goals for the market economies, like the US economy, work against each other, it is _ all of them against each other.

lassiez-faire

Even though many market economies believe in _ -as society has changed it has become necessary to involve the government (contrary to definition)

Adam Smith’s Wealth of the Nations

“People must have the freedom to buy, freedom to buy, freedom to sell, freedom to try, freedom to fail”

Econ. and social Goals

• Every Econ. System has these

• Serves as a benchmark to determine if needs are met

• U.S. has 7 of these

Econ. Freedom

• People want to choose their own occupations, employers, how to spend $

• Businesses choose where and how to produce

Econ. Efficiency

• Factors of production must be used wisely because resources are scarce

• Wasted resources yield less good and services= fewer needs and wants satisfied

Econ. Equity

• strong sense of economic fairness, justice & impartiality

• no discrimination in employment, false advertising, minimum wage, or laws protecting consumers

Econ. Security

We want protection in case of

• Illness-health insurance

• Layoffs- unemployment compensation

• Retirement- social security 90% of workers participate

• Safety net concept- gov. to be there for needs that we can’t attend to

Full employment

• Econ system should provide as many jobs as possible

• No job= people can’t support themselves/family, nor can they produce goods and services for others

• Desirable unemployment rate 4%-5%

Price stability

• help avoid inflation. When inflation is high, so are interest rate and prices

• makes budgeting easier and adds a degree of certainty about the future

Econ. Growth

• People can have more goods and services

• Our population is likely to rise; growth is necessary to meet everyone’s needs

Necessary

Most people agree these 7 goals are _ for our system to work; what people may disagree on is their ideas about how to reach them