Economic Systems

Traditional Economy

The use of scarce resources stems from ritual, habit, or custom. Economic decisions are made by ancestors or elders.

Market Economy

The use of scarce resources is dispersed throughout the society. Economic decisions are made by individuals.

Command Economy

The use of scarce resources is determined by a central authority. Economic decisions are made by the government.

Mixed Economy

The only kind of economic system that exists in the real world. All other systems are theoretical ideals.

Socialism

Basic productive resources are gov't owned, the rest are privately owned. Gov't plans and directs allocation of resources in key industries.

Capitalism

Productive resources are privately owned and operated. Resources for production are obtained by individuals' desire for profit but the gov't may promote competition and provide public goods.

Communism

All productive resources are gov't owned and operated, centralized planning directs resources, and gov't makes all economic decisions.

Circular Flow Matrix

Model depicting the interchange of resources and products in a market economy.

Monopoly Laws, Emissions Standards, Quality Assurance Laws, Licenses

Name 3 examples of command elements in the US economy:

The Product Market

In the circular flow matrix, businesses sell goods and services where?

Revenue

What is money paid to businesses for goods and services called?

Costs

What is money paid by businesses for resources called?

Income

What is money paid to households for resources called?

Spending

What is money paid by households for goods and services called?

Rent

What kind of income is paid for land?

Interest

What kind of income is paid for capital?

Wages

What kind of income is paid for labor?

Profits

What kind of income is paid for entrepreneurs?

Subsidies

What is government money given as incentives to businesses called?

Welfare

What is government money given directly to households called?

Taxes

What is money given by businesses and households in exchange for public goods?

Monopoly

Market structure with only one seller of a particular product.

Oligopoly

Market structure in which a few very large sellers dominate an industry.

Monopolistic Competition

Market structure that has all the conditions of perfect competition except identical products.

Perfect Competition

A market structure characterized by a large number of well informed independent buyers and sellers who exchange identical products.

Benefits of competition:

Higher quality goods and services, improved service, lower prices, increased innovation , more adaptive workforce

The resource market

In the circular flow matrix, households sell the factors of production where?

Advantages of a command economy:

Capable of quick, dramatic change; many basic public services available at little or no direct cost

Disadvantages of a command economy:

Does not meet the needs and wants of consumers; Lacks effective incentives to get people to work; Requires large bureaucracy, which consumes resources; Has little flexibility for day to day change; Inefficient allocation of resources

Advantages of traditional economies:

Sets forth clear economic roles for all members of the community; stable, predictable, and continuous life

Disadvantages of a traditional economy:

Discourages new ideas; Stagnation and lack of progress; Lower standards of living

Advantages of market economies:

Individual freedom; capable of gradual adjustment to change; lack of gov't interference; high variety of goods and services; higher degree of consumer satisfaction; higher standards of living

Disadvantages of market economies:

rewards only productive resources (not the young, old, or sick); does not produce public goods; workers and businesses face uncertainty from competition or change

Mercantilism

A state-driven economic system which emphasizes the build up of mineral wealth by means of a favorable balance of trade.

Feudalism

Economic system in which the nobles held lands from the monarch in exchange for military service and poor farmers exchanged labor to nobles for protection

Fascism

Economic system characterized by total state control, with some private property, aimed at the supremacy of the nation over the individual and the world