Unit 1: Economic Systems

Economy

The way a society organizes the production, distribution, and consumption of goods and services

Economic System

The set of rules and institutions a society uses to decide what to produce, how to produce it, and who receives goods and services

Scarcity

The basic economic problem that exists because resources are limited but human wants are unlimited

Opportunity Cost

The value of the next best alternative that is given up when making a decision

Inflation

A general increase in prices over time that reduces the purchasing power of money

Traditional Economy

An economic system based on customs, traditions, and beliefs passed down through generations

Market Economy

An economic system in which individuals and businesses make decisions based on supply and demand with LITTLE government involvement

Command Economy

An economic system in which the government makes most economic decisions

Mixed Economy

An economic system that combines elements of both market and command systems

Capitalism

An economic system based on private ownership, free markets, voluntary exchange, and profit

Socialism

An economic system in which the government owns or controls major industries to promote economic equality.

Communism

An economic system in which all property is owned collectively and the government controls production and distribution

Market

Any place or system where buyers and sellers exchange goods or services

Supply

The amount of good or service producers are willing and able to sell at different prices

Demand

The amount of a good or service consumers are willing and able to buy at different prices

Voluntary Exchange

A trade in which both the buyer and seller believe they will benefit

Profit

The money a business earns after subtracting costs from revenue

Competition

The rivalry among businesses to attract customers

Consumer Sovereignty

The idea that consumers influence what is produced through their buying choices

Specialization

When individuals or businesses focus on producing a limited range of goods or services to increase efficiency

Private Property Rights

The right to own, use, and sell property and resources

Laissez-Faire

An economic philosophy that supports minimal government involvement in the economy (“hands off” approach)

Nationalize

When the government takes ownership or control of a private business or industry

Privatize

When the government transfers ownership of a business or service to private individuals or companies

Circular Flow Model

A model that shows how money, goods, and services move between households, businesses, and government

Product Market

The market where goods and services are bought and sold

Factor Market

The market where labor, land, and capital are bought and sold

Global Economy

The worldwide system of trade and economic relationships among countries

What country has the purest form of command economy today

North Korea

What country today is closest to a pure market economy

U.S.

What are the 3 Economic Questions

What, How, and For Whom

What- What to produce

How- How to produce it

For Whom- For Whom it is being produced

Examples of economic economy

Tribes, Amish, Inuit

Greatest strength of a command economy?

It meets the basic needs of people

Strengths/weaknesses of a market economy?

Competition creates better products.

Elderly and sick basic needs are not met

What is the difference between a free market and capitalist economy?

Capitalist is a private ownership and market is less government involvment

What is the Nordic Model

It is a “Social Democratic”

Mix between market and command

Sweden, Norway, and Denmark use it

Private ownership, supply and demand

Many benefits come from the high taxes

What are some results of entrepreneurs succeeding?

Business progress

Workers getting payed more

Consumers get new and better products

More tax money attained from government

What is a role of the consumer

To decide what products are produced

Traditional economy strengths/weaknesses

Predictable, set roles, connects the community

No growth, low living standard

Command economy strengths/weaknesses

Government provides everything, basic needs are met

No work incentive, little flexibility

Market economy strengths/weaknesses

Government stays away, self-regulated government

Monopolies are present