Economics Chapter 2: Economic Systems

economic system

the way a society uses resources to satisfy its people's wants

traditional economy

an economic system in which people produce and distribute goods according to customs handed down from generation to generation

command economy

an economic system in which the government makes all economic decisions

market economy

an economic system in which individual choice and voluntary exchange direct economic decisions

centrally planned economy

a system in which central government officials make all economic decisions

socialism

an economic system in which the government owns some or all of the factors of production

communism

economic system in which the government owns all the factors of production and there is little to no political freedom

authoritarian

systems require absolute obedience to those in power

private property rights

are the rights of individuals and groups to own businesses and resources

market

any place where people buy and sell goods and services

laissez faire

the principle that the government should not interfere in the marketplace

capitalism

is an economic system that is based on private ownership of the factors of production

voluntary exchange

is a trade in which both traders believe that what they are getting is worth more than what they are giving up

profit

a financial gain that a seller makes from a business transaction

competition

involves all the actions sellers, acting independently, do to get buyers to purchase their products

consumer sovereignty

the idea that consumers have the ultimate control over what is produced because they are free to buy what they want and to reject what they don't want

specialization

a situation in which people concentrate their efforts in the activities that they do best

mixed economy

an economy that has elements of traditional, command, and market systems

nationalize

means to change from private ownership to government or public ownership

privatize

means to change from government or public ownership to private ownership

global economy

refers to all the economic interactions that cross international boundaries

Utopia

Book by Thomas Moore that describes a society without scarcity where wants are limited and easily fulfilled. Means "no place" in Greek.

three economic questions

1. What should be produced?

2. How should it be produced?

3. For whom should it be produced?

goal of traditional economy

survival

modern-day examples of command economies

North Korea, Cuba

5 advantages of traditional economy

1. clearly answers economic questions

2. produces what best ensures its survival

3. methods of production stay the same

4. systems of distribution are determined by custom and tradition

5. little disagreement over economic goals and roles

4 disadvantages of traditional economy

1. resist change- less productive than they might be if they adopted new approaches

2. prevent people from doing jobs that they want to do or are best suited to do

3. lower productivity means that people do not acquire the material wealth that people in other societies do

4. lower standard of living

beliefs of Karl Marx

-19th century German philosopher, historian and economist

-believed that all of history is a struggle between classes

-with means of production owned by the government, the class struggle would be resolved

Who owns resources in Communism?

Government

Who owns resources in Socialism?

Government owns basic resources; rest are privately owned

Who owns resources in Market System?

All resources privately owned

How are resources allocated in Communism?

Government planners decide how resources are used

How are resources allocated in Socialism?

Government planners allocate basic resources; market forces allocate privately-owned resources

How are resources allocated in Market System?

Market forces allocate resources

What role does the government play in communism?

Government makes all economic decisions

What role does the government play in socialism?

Government makes decision in the basic industries

What role does the government play in market system?

government's role limited- mostly to ensure market forces are free to work

Democratic Socialism

Established through the democratic political process rather than violent overthrow of the government

Major work written by Karl Marx

Communist Manifesto

2 advantages of command economies

1. seek to provide for everyone

2. leaders use nation's resources to produce items that may not make money in a market economy

4 disadvantages of command economy

1. central planners have little understanding of local conditions

2. workers have little motive to improve productivity because they are paid same wages regardless of output

3. set prices below those that would be established in a market system, so they face shortages

4. suffering- individual rights subordinate to needs of state

7 fundamentals of a market economy

1. private property

2. specialization

3. consumer sovereignty

4. competition

5. profit

6. voluntary exchange

7. government involvement

4 advantages of market economy

1. economic and political freedom

2. accomodate changes quickly

3. profit

4. high quality products because of competition

3 disadvantages of market economy

1. no mechanism for providing public goods and services because it is not profitable

2. cannot provide security for old/sick people

3. unequal distribution of wealth

2 Trends in Modern Economies

1. changes in ownership

2. increasing global ties