Chapter 2 Economics Presentation PDF

ECONOMICS Chapter 2 Economic Systems SECTION 1 INTRODUCTION TO ECONOMIC SYSTEMS WHAT IS AN ECONOMIC SYSTEM? • An economic system is the way a society uses resources to satisfy its people’s wants • There are three types of economic systems: traditional economies, command economies, and market ec...

ECONOMICS Chapter 2 Economic Systems SECTION 1 INTRODUCTION TO ECONOMIC SYSTEMS WHAT IS AN ECONOMIC SYSTEM? • An economic system is the way a society uses resources to satisfy its people’s wants • There are three types of economic systems: traditional economies, command economies, and market economies. WHAT IS A TRADITIONAL ECONOMY? • A traditional economy is an economic system in which people produce and distribute goods according to customs handed down from generation to generation WHAT IS A COMMAND ECONOMY? • A command economy is an economic system in which the government makes all economic decisions • The government decides what goods and services will be produced, how they will be produced, and how they will be distributed • The wants of the individual consumers are rarely considered • The government usually owns the means of production – all of the resources and factories • North Korea and Cuba are current examples of command economies. WHAT IS A MARKET ECONOMY? • A market economy is an economic system in which individual choice and voluntary exchange direct economic decisions • In a market economy, individuals act in their own self-interest when they make economic choices CHARACTERISTICS OF A TRADITIONAL ECONOMY: PURPOSE, ADVANTAGES, AND DISADVANTAGES • Purpose: • Survival. In the earliest times, all societies had traditional economies; these economies tend to be inefficient and do not adapt to change. • Advantages: • Traditional economies clearly answer the three economic questions; they produce what ensures their survival, the methods of production have always been the same, and distribution has been determined by custom and tradition. • Disadvantages: • Because traditional economies are based on ritual and custom, these economies resist change • These economies are less productive, traditional roles prevent people from doing what they want to or are best suited for, and the people tend to have a much lower standard of living. SECTION 2 COMMAND ECONOMIES WHAT IS A CENTRALLY PLANNED ECONOMY? • A centrally planned economy is a system in which central government officials make all economic decisions. TYPES OF COMMAND ECONOMIES: SOCIALISM • Socialism is an economic system in which the government owns some or all of the factors of production. • Who owns the resources? The government owns basic resources, the rest are privately owned. • How are resources allocated? Government planners allocate basic resources, while market forces allocate privately-owned resources. • What role does government play? The government makes decisions in the basic industries. TYPES OF COMMAND ECONOMIES: COMMUNISM • Communism is an economic system in which the government owns all the factors of production and there is little or no political freedom. • Who owns the resources? The government owns the resources. • How are resources allocated? Government planners decide how resources are used. • What role does the government play? The government makes all economic decisions. CHARACTERISTICS OF A COMMAND ECONOMY: ADVANTAGES • They seek to provide for everyone, even the sick and the old who are longer productive economically. • Can use the nation’s resources to produce items that may not make money in a market economy – certain medicines, for example. CHARACTERISTICS OF A COMMAND ECONOMY: DISADVANTAGES • Central planners often have little understanding of local traditions; because of this, their economic decisions are frequently misguided or wrong. • Workers often have little motive to improve their productivity, since they know they will be paid the same wages regardless of their output • Because there is no private property, there is no motivation for workers to use resources wisely • Centrally planned economies often set prices well below those that would be established in a market system; as a result, command economies face shortages • Perhaps the greatest failing of strict command systems is the great suffering that people living under them endured; centrally planned economic policies require that individual rights – even the right to life – be subordinate to the needs of the state SECTION 3 MARKET ECONOMIES WHAT ARE PRIVATE PROPERTY RIGHTS? • Private property rights are the rights of individuals and groups to own businesses and resources • In economic terms, property means everything that an individual owns • Property includes factories, offices, clothes, furniture, house, car, and other belongings; money, and even intellectual property, such as songs or ideas developed for inventions; it also includes the labor individuals provide to earn money to buy what they own WHAT IS A MARKET? • A market is any place where people buy and sell goods and services. WHAT IS CAPITALISM? • Capitalism is an economic system that is based on private ownership of the factors of production • Capitalism, the foundation of market economies, operates on the belief that, on their own, producers will create the goods and services that consumers demand; therefore, there is no need for government involvement in the marketplace. WHAT IS A VOLUNTARY EXCHANGE? • A voluntary exchange is a trade in which both traders believe that what they are getting is worth more than what they are giving up • In a market economy, most trade is based on an exchange of a product or service for money WHAT IS A PROFIT? • A profit is a financial gain that a seller makes from a business transaction • Self-interest guides voluntary exchanges, the seller’s self-interest is likely served by profit WHAT IS COMPETITION? • Competition involves all the actions sellers, acting independently, do to get buyers to purchase their products • Market economies are also characterized by competition WHAT IS THE CIRCULAR FLOW MODEL? • The circular flow model is a tool that economists use to understand how market economies operate • The model represents the two key economic decision makers in a market economy – households and businesses; it also shows the two markets where households and businesses meet – that for goods and services, and that for resources. CHARACTERISTICS OF A MARKET ECONOMY: ADVANTAGES • Individuals are free to make their own economic choices • The economy is generally less cumbersome and costly since there are fewer areas of government involvement • A market economy can also be responsive to changes in conditions and can accommodate those changes quickly • The profit motive ensures that resources will be allocated efficiently, since inefficiencies would result in lower profits • It encourages competition; competition leads to higher-quality products at lower prices and create a diverse product market CHARACTERISTICS OF A MARKET ECONOMY: DISADVANTAGES • In a pure market economy, it has no mechanism for providing public goods and services, such as national defense, because it would not be profitable from a strictly economic viewpoint • Pure market economies cannot provide security to those who, because of sickness or age, cannot be economically productive; nor can it prevent the unequal distribution of wealth, even though that gap may be the result of unequal opportunities SECTION 4 MODERN ECONOMIES IN A GLOBAL AGE WHAT IS A MIXED ECONOMY? • A mixed economy is an economy that has elements of traditional, command, and market systems. • All modern economies are mixed. WHAT TYPE OF ECONOMY DOES THE UNITED STATES HAVE? EXPLAIN. • Mixed economy • In the United States, the market economy dominates; even though there are elements of each economic system, the driving forces of the U.S. economy are such features as private ownership and markets; so, the United States is essentially a market economic system WHAT IS THE GLOBAL ECONOMY? • The global economy refers to all the economic interactions that cross international boundaries • Today, American consumers and businesses are actors in the world economy; businesses now engage in more foreign trade than ever before, and they depend not only on the products they buy from foreign nations, but also on the foreign markets which sell their products.