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Economic System
An organized method of allocating scarce resources, such as Traditional, Market, Command, and Mixed.
Traditional Economy
Based on customs and rituals; roles are determined by tradition.
Market Economy
Economic decisions are based on voluntary exchanges between households and firms.
Command Economy
Central planners in the government make economic decisions.
Mixed Economy
Combines market principles with a role for government regulation (e.g., the U.S.).
Examples of Market Systems
United States, Hong Kong, South Korea.
Examples of Command System
Historical examples include the Soviet Union and Cuba.
Efficiency
Making the most of scarce resources.
Freedom
The ability to buy and sell most goods and services freely (e.g., the U.S.).
Equity
Being paid based on skill level, ensuring fairness in distribution.
Security
Assurance of access to essential resources and unemployment benefits.
Growth
Improving the standard of living and production over time.
Innovation
Improving existing technologies.
Specialization
The focus on specific tasks to improve efficiency.
Division of Labor
Assigning different parts of a task or process to improve production.
Factors of Production
Resources like labor, capital, and raw materials necessary for production.
Households
They provide labor and consume goods/services.
Firms
They produce goods/services and hire labor.
Outputs
Goods and services produced by firms.
Inputs
Resources (labor, land, capital) provided by households.
Consumer Spending
Flow of money from households to firms in exchange for goods/services.
Labor and Wages
Flow of labor from households and payments from firms.
Examples of Firms
Microsoft, Disney, Apple, but not households.
Examples of Traditional Economies
Inuits of Canada, Mbuti in Central Africa.
Disadvantage of Traditional Economies
Resistance to new ideas, slow to adapt to change.
Competition in a Market Economy
Encourages variety, quality, and competitive pricing but avoids monopolies.
Importance of Specialization
It allows for higher efficiency and productivity.
Varying Government Involvement in Mixed Economies
Governments regulate to ensure equity and security while allowing market forces to dictate most economic activity.
First Economic Question
What goods and services should be produced?
Second Economic Question
How should these goods and services be produced?
Third Economic Question
Who should these goods and services be produced for?
