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Economics, Ch. 2

Economic systems

2.1, 2.2, 2.3

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Review: What are the three basic economic questions?

• What to produce• How to produce• For whom to produce.• A nations responses are determined by its economic

system, which reflects the process a nation follows to produce goods and services.

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What are the four types of economic systems?

• Traditional, command, market and mixed.• All economies today are mixed, a pure economy doesn’t

exist• Mixed economies that are closest to the pure command

model are classified as command economies. Same with other types of economies.

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Traditional Economy

• Based on a societies values, customs and traditions.• Tradition decides what you produce. If your family has

always caught fish, your family will most likely always catch fish. Roles are usually passed down from father to son and mother to daughter.

• Traditional economies still exist in parts of N. America, Asia, Africa, San of the Kalahari Desert and the Aborigines of Australia.

How are the three basic economic questions answered in traditional economies?

• They are found in the past. Contemporary economic activities are based on the collection of rituals, habits, laws and religious beliefs developed by the groups ancestors.

• For whom? The entire group or tribe

5.1

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Command Economy

• The government has complete control over production.• Also called planned economies• Individuals in a command economy have little or no say

in economic choices.• Command economies were popular in the past. Egypt

(2700-2200 b.c.), China (1122-221 b.c.), western europe in the middle ages.

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How are the three basic economic questions answered in command economies?

• Relies on government officials to answer the three basic economic questions.

• Officials, or central planners, have the power to decide what products will be produced and how.

• They also decide who will receive the products.

8Market economy

• People can buy, sell and produce anything.• Market – free exchange of goods and services.• Ex. US, Germany, and Japan

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How are the three economic questions answered in market economies?

• Individuals answer the three basic questions. • For whom? Everyone• How? Anyway• What? anything

What are the roles of self-interest and incentives in a market economy?

• Self-interest benefits all of society by helping the economy grow.

• In a market exchange, each person attempts to gain the greatest possible advantage.

• Self-interests serve as an “invisible hand” that leads them to do what is best for society.

• Incentive – something that encourages you to act in a certain way.

• Examples of incentives include commercials, billboards, ads, etc..

2.1

What types of mixed economies exist today?

• Authoritarian socialism – (communism) the government controls nearly all the factors of production which in turn limits the decision making power of individuals. Ex. Cuba

• Capitalism – individuals own the factors of production and answer the basic economic questions. Ex. US, Canada, Mexico, Japan and Taiwan. The governments involvement in the economy is limited.

• Democratic socialism – the government owns only some of the factors of production like phone and electrical utilities. Ex. Sweden, Poland, France, Tanzania, Angola, and Mozambique.

2.1

What are the basic principals of free enterprise in the US?

• Individuals have the right to:• Own private property• Make individual choices,• Engage in economic competition• Make decisions based on self-interest and• Have limited government interference when participating in

the economy (laissez-faire)

2.2

What are the 2 markets in the circular flow model?

• Product market: all of the exchanges of goods and services in the economy

• Resource market: exchange between the resources between those who use them.

2.2

How does the circular flow model reflect exchange?

• Its shows the exchanges between the flow of resources and the flow of payments.

2.2

How do nations decide how to use scarce resources?

• They set goals. A nation’s policymaker makes choices on how to use scarce resources depending on the goals that are set.

2.3

What are the major goals of the US economic policy?

• The US economic goals are freedom, efficiency, equity, security, stability, and growth.

• Economic freedom: maintaining freedom of choice in the marketplace.

• Economic efficiency: efforts to make the best use of scarce resources.• Economic equity: (economic justice) fairness of choices in economy• Economic security: protection from poverty, medical emergencies

and other things that could put someone’s economic well-being in danger.

• Economic stability: full employment and stable prices.• Economic growth: increase the amount of goods and services put out

by each worker in the economy.

2.3

Why do economic goals sometimes conflict?

• People’s needs and wants may conflict, priorities can conflict, solutions can conflict and priorities can change.

• To fix this, the nation will depict what economic goals are more important, then assign which goal they will plan to meet first.

2.3