Economic Systems
Word Up Chapter 2Pick a partner and make 15 flash cards.Look up
all 15 key terms, using the text.One side write the word, on the
other side write the definition Make sure they are completed and
you have looked them over. You will use them for Wednesday's Word
Up challenge
Key Terms:marketincentivefirmindustrycircular flow
modelself-interestFactor paymentstraditional economycommand
economymarket economymixed
economyfree-enterprisecapitalismcompetitionlaissez faire
Chapter 2
Economic Systems
What to do with our Resources is based on satisfying the
greatest number of wants & needs. -Every Economic System must
answer - **3 Economic Questions** 1) What to produce ? 2) How to
produce ? 3) For whom to produce ?- 3 Economic Questions -
What to produce
Societies decide what is most important to satisfy its wants and
needs.What resources (land, labor, & capital) are
available?What are the opportunity costs of those decisions?
How to produce
How do we use our available resources?Is there a more efficient
way to use them?What combinations of land, labor & capital are
needed to produce?How are worth & price of resources
decided?Apple pieApple juice
There must be a more efficient way to get these applesFor whom
to produce What is the market for it?Who will use the product? Who
has the greatest need?Who can afford the products?I dont think this
is going the right way
Economic SystemsThere are 4 types of systems that address the 3
economic questions about production in different ways.Traditional
economyCommand economyMarket economyMixed economy
Traditional EconomyAnswers the economic questions based on
cultural traditions, habits, or ritualsRelatively small
communitiesGenerally agricultural economies
Strong families, religious beliefsLow standard of livingLittle
room for innovation
Ex: Amish or tribal communities
Command EconomyRelies on government or central planning
committee to answer economic questions.Individuals have little or
no say in economic planning and freedom of choice.The government
has control or owns resources.Also known as Planned,
Communism...Ex: Cuba, North Korea, former Soviet Union
former11
Karl Marx1848 - Introduced his form of socialism called
Communism.Russia will be one of the first to adopt Marxs
ideals.Karl Marx (1818-1883) had said that industrialisation had
made the middle classes rich and powerful but had made the workers
slaves.
Market Economy
Individuals answer economic questions.Individuals &
businesses use the market to exchange goods & money.Individuals
& private businesses own & control resources. Ex: United
States, Canada, Hong Kong, EnglandAlso called free-enterprise or
capitalism
Economic SystemsThere are 4 types of systems that address the 3
economic questions about production in different ways.Traditional
economyCommand economyMarket economyMixed economy
HOUSEHOLDS
OWNERS OF LAND, LABOR, & CAPITAL/MONEY
BUYERS OF PRODUCTS & RESOURCES. FIRMS/BUSINESS
BUYERS OF RESOURCES.
PRODUCERS OF GOODS & SERVICES.The Circular Flow
Model(INDUSTRIES are A NUMBER OF FIRMS THAT DO THE SAME THING)
Can we afford them all
HOUSEHOLDSUSE RESOURCES TO MAKE PRODUCTS &/OR PROVIDE
SERVICESFIRMSSELL RESOURCES TO FIRMSPROVIDE GOODS/ SERVICES TO
HOUSEHOLDS
Circular Flow for ResourcesLandLaborCapital
HOUSEHOLDSFIRMSPAY INCOME TO HOUSEHOLDS FOR RESOURCESBUY GOODS
& SERVICES with MONEY
Circular Flow for the money
Market EconomySpecialization leads to economic efficiencyMore
innovative & higher technologyThe market is driven by
self-interest.
Market EconomyStrong sense of competition- rivalry between
companies.Incentives encourage individuals & businesses to
behave in a certain way.Businesses are motivated by
profits/financial gain.
$1.50$1.25Adam SmithA Scottish economist in the 1700s.Wealth of
Nations - written in 1776 describes how a Market system can
flourish.Called for economic laissez faire- restricted government
involvement.The Invisible Hand - Self-interest can drive the
market, ultimately society benefits.
(Hands Off or Let them do)
Mixed Economy
Combines the elements of Traditional, Command, and Market
economies.The government has varying degrees of involvement: -
regulates business - provides a safety net for those in needAll
economies are actually mixed: Most tend to lean heavy towards one
system.
JOHN NASH:modern day mathematician
~ won the Nobel Prize in 1994~ subject of A Beautiful Mind Wrote
the Nash Equilibrium of Game TheorySmiths Invisible Hand theory was
incomplete.
In an economy, we practice Game Theory: The Science of Strategy
individuals will plan & act based on what we believe other
people will do.
The Nash Equilibrium states: individuals will act for their own
self-interest & for the benefit of the group.
The outcome may not be the best, but you will be able to stay in
the game.The End
23Describe MeExplain 4 characteristics of a Free Market Economy.
What are its advantages? What would suck about it?
Explain 4 characteristics of a Command Economy. What are its
advantages? What would suck about it?
TextbookPages: 28-38