Unit 1 - Economic Systems Around the World & the Global Economy

https://www.youtube.com/watch?v=B43YEW2FvDs

Traditional Economic System

The customs and habits of the past are used to decide what and how goods will be produced, distributed, and consumed. Each member of society knows from early on what their role in the larger group will be.

• Bartering is used for trade: trading without money (trading one good for another)

Command Economic System

The government planning groups make the basic economic decisions. The government determines which goods and services are to be produced, the prices and the wage rate. The government, not the people, own farms and businesses.

Market Economic System

An economic system in which economic decisions are guided by the changes in prices that occur as individual buyers and sellers interact in the marketplace to determine the sale of goods (based on what the people want and what they are willing to pay). Based on free enterprise and competition between manufacturers.

Mixed Economic System

Mixed economy has characteristics of both pure command and market economies. All modern economies have characteristics of both systems and are often referred to as mixed economies though most economies are closer to one type of economy than another.

Economic System

The way a government or society organizes the production, distribution, and consumption of goods and services. It determines how resources are allocated.

What are the four main economic systems?

Traditional, Command, Market, Mixed

What are the main advantages of a Mixed Economic System?

1. Distributes goods and services to where they are most needed.

2. Rewards the most efficient producers with the highest profit, meaning consumers get the best value for their money.

3. Encourages innovation to meet customer needs more creatively, cheaply, or efficiently.

4. Automatically allocates capital to the most innovate and efficient producers.

5. A larger governmental role in the economy allows for fast mobilization to priority areas, such as defense, technology, and aerospace.

6. Less competitive members receive care from the government, no one is left behind in income inequality.

What are some disadvantages of a Mixed Economic System?

1. If the market has too much freedom, it can leave less competitive members of society without any government support.

2. Too much government involvement could bloat spending in one sector, increasing the country’s debt and slowing down economic growth in the long run.

3. Too much freedom could mean successful businesses being bailed out by the government from bankruptcy rather than regulating the business and process.

Physical Capital

Human-made objects used to create other goods and services such as buildings, equipment

Human Capital

Knowledge and skill a worker gains through education and experience

Entrepreneurs

Leaders who decide how to combine land, labor, and capital to create goods and services

Factors of Production

Resources that are used to make goods and services (there are 3 factors of production; land, labor, and capital)

Scarcity

The scenario of a limited quantity of resources to meet unlimited wants

Economic Efficiency

make the best use of resources

Economic Freedom

giving citizens choice in economic decisions; some economies don’t have this goal

Economic Security and Predictability

instability is bad for an economy

Economic Equity

fair distribution of wealth; some economies don’t have this goal

Economic Growth and Innovation

innovation leads to economic growth

Land

refers to all natural resources used to produce a good/service such as farmland, coal, water, forest, etc.

Labor

the effort (time,energy, and skill) to produce a good/service

Capital

any human-made resource that is used to produce a good/service such as a tool

Self-interest

In the market, buyers and sellers consider their personal gain in economic decisions

• The motivating force of the free market

Competition

In the market, consumers will buy the lowest price option among comparable goods

• This is the regulating force of the market economy

Laissez Faire

The doctrine of a free market where it is believed that the government should not interfere in the marketplace

• Sometimes translated as “allow to do or let them do”

Invisible Hand

Regulation of the market by self-interest and competition

Perfect Competition

Large number of firms all producing essentially the same product

What are the four conditions for perfect competition?

1. Many buyers and sellers participate in the market

2. Sellers offer identical products

3. Buyers and sellers are well informed about products

4. Sellers are able to enter and exit the market freely

Direct Competition

Between two companies that have a similar product or service and compete against each other

Indirect Competition

Competition among companies that sell different types of goods but are targeting the same customer group.

What is an example of Direct Competition?

McDonald’s vs. Wendy’s - Both selling a similar product

What is an example of Perfect Competition?

Farmers Market - everyone is selling similar products for similar prices

Monopoly

Only one seller is in the market, and barriers prevent other firms from entering the market. This could occur when there is a high startup cost.

• Monopolies disrupt competition and can cause prices to increase

Natural Monopolies

Created when it is most efficient to have one provider, for example public utilities so that they can be regulated by the government

Government Monopoly

Created by the government, usually to issue patents

What is an example of a Monopoly?

• Public Utilities (Electric Company)

• Google Search Engine

Oligopoly

The market is dominated by a few large, profitable firms. This gives the ability to price fix! Usually, there are significant barriers to limit entry into the market.

(The four largest firms produce 70 to 80 percent of the output)

What is an example of an Oligopoly?

Auto Industry - Ford, Chevy, Toyota dominate the field)

Collusion

An illegal agreement among firms to divide the market, set prices, or limit production.

Barriers to Entry

Factors that make it difficult for a new firm to enter the market

Cartel

an agreement by a formal organization of producers to coordinate prices and production which gives them significant control over a market

Monopolistic Competition

Many companies compete in an open market to sell products that are similar but not identical

• Each firm holds a monopoly over its own particular product.

The 4 conditions of Monopolistic Competition

1. Many Firms

2. Few Artificial barriers to entry into the market

3. Slight control over price

4. Differential Products

What is an example of Monopolistic Competition?

Grocery Stores - Offering Similar products but different experiences & prices)

Regulation and Deregulation

Most governments exert some regulation of their economies, but how much regulation varies from country to country

• To ensure monopolies do not exist in the US, there are Antitrust laws that prevent monopolies

• The US has also blocked mergers to prevent firms from gaining too much control of a market.

• Some regulations have been put in place for consumer safety, environmental protection, etc.

Deregulation

Reducing economic regulation

• Can occur because of increased number of producers, a reduced demand for good/service, etc.

What is an example of regulation?

OSHA - Ensure that employers provide their workers with a working environment free from harm and hazards

What is an example of Deregulation?

Telecommunication Deregulation - Aimed to increase competition and innovation in the sector.