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What are the 3 types of economic systems?
traditional economy
command economy
market economy
What is a traditional economy?
use of resources based on ritual, habit, or custom (Inuit tribes, Australian Aborigines)
What are the advantages of a traditional economy?
little uncertainty over what to produce, how to produce, and for whom
What are the disadvantages of a traditional economy?
discourage new ideas and new ways of doing things; stagnation; lower standard of living
What is a command economy?
central authority (government) makes decisions (Soviet Union, Cuba, North Korea)
What are the advantages of a command economy?
cheap public services & health care; can change direction drastically (switch from agriculture to industry)
What are the disadvantages of a command economy?
ignore basic wants & needs of consumers; large decision making bureaucracy raises cost of production; no flexibility; few rewards; limited private property, few personal freedoms
What is a market economy?
people make decisions in their own best interest; private ownership of resources & factors of production (U.S., England, Japan, etc.)
What are the advantages of a market economy?
individual freedom (how to spend money, where to work, etc.); adjusts gradually to change over time (buying gas vs. buying SUVs); small amount of government interference; decision making is decentralized; variety of goods/services; high degree of consumer satisfaction
What are the disadvantages of a market economy?
doesn’t provide enough goods/services for everyone; high degree of uncertainty (loss of job)
What kind of economy do most countries have?
a mixture of all three types: command, market, and traditional
What is economic freedom?
choose your job, etc.
What is economic efficiency?
not wasting resources
What is economic equity?
fairness; minimum wage
What is economic security?
protection; Social Security, healthcare, unemployment insurance
What is full employment?
everyone has a job
What is price stability?
avoid inflation
What is inflation?
rise in general level of prices
What is minimum wage?
lowest legal wage paid to most workers
What is economic growth?
better job, newer car, etc
What is free enterprise?
resources are privately owned, & competition thrives with minimum government interference
What are the characteristics of free enterprise?
economic freedom
voluntary exchange
private property rights; gives people incentive
profit motive
competition
What is voluntary exchange?
act of buyers/sellers freely willing to engage in market transactions
What is profit motive?
incentive to earn reward of money
What is competition?
struggle to attract consumers
What is the role of the entrepreneur?
organizes and manages land, capital & labor
Why did entrepreneurs say they want to be an entrepreneur?
tired of working for someone else
“be my own boss”
dream of success, but high risk of failure
What does an entrepreneur’s success lead to?
growing business, hiring more workers, pay raises, better products, government gains more tax revenue, creation of more companies which can lead to lower prices
What is the role of the consumer?
they determine which products are produced based on their buying habits
What is consumer sovereignty?
customer rules the market; “customer is always right”
What is money spent in a marketplace viewed as?
consumer’s “vote”
What do consumers want?
change; new ideas & products
What are the 4 roles of government?
protector
provider
regulator
consumer
What does the government do as protector?
enforce laws that protect consumer (FDA, EPA, etc.); enforce laws that prevent abuse (discrimination laws)
What does the government do as provider?
provides goods/services to citizens: justice system, national defense, funding for schools, roads, libraries, agriculture
What does the government do as regulator?
preserving competition; oversees interstate commerce, communication, banking, insurance rates, building permits
What does the government do as consumer?
spend money to consume resources: government spends more than all private businesses combined
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