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