What Is an Economy?

Traditional Economy • System where societies make economic decisions based on family, tribe, or clan customs and beliefs. • Men and Women have set roles • Men- hunt and herd animals • Women- farm and take care of kids

Found in rural, under-developed countries– Vanuatu Pygmies of Congo Eskimos & Indian tribes

Advantages and Disadvantages of Traditional Economy • Advantage- answers the three essential economic questions, What- enough to survive, How- follows tradition, For Whom- divided up through tradition • Disadvantage- Systems are not changed, leads to less productivity. People are born into their role, lower standard of living

Command Economy • Gov’t decides what, how, and for whom to produce. • Gov’t decides how to satisfy wants and needs of the consumer • Basically, they control all aspects of economy

Section 2- Command Economics • Gov’t decides what and how a good or service should be produced • They determine wages, economic roles, and they make all decisions. • They even tell you who can operate a business and how much they can sell a month

Command Economy • The government (or central • Advantages authority) determines what, – Guarantees equal standard how, and for whom goods of living for everyone and services are produced. – Less crime and poverty • Two types: – Needs are provided for – Strong Command – where government makes all decisions (communism – China, Cuba) – Moderate Command – where some form of private enterprise exists but the state owns major resources (socialism – France and Sweden)

through the government

• Disadvantages – Minimal choices – Fewer choices of items – No incentive to produce better product or engage in entrepreneurship

• Also known as a Planned or Managed Economy

Socialism and Communism • These political systems are the best ex. of command economies • Both were influenced by the historian and economist Karl Marx

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What Is an Economy?

Communism

Communist countries have a totalitarian form of government; this means that the government runs everything and makes all decisions. Theoretically, there is no unemployment in communist countries.

The government decides the type of schooling people will receive and also tells them where to live. 8

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What Is an Economy?

Socialism

The main goal of socialism is to keep prices low for all people and to provide employment for many. The government runs key industries, generally in telecommunications, mining, transportation, and banking. Socialist countries tend to have more social services.

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Advantages and Disadvantages • Provide for sick and elderly • Disadvantages- Central gov’t does not understand “local” problems • No private property, leads to lack of motivation to use resources wisely • Prices are set, leads to shortages • No individual rights

Market Economy (Free Enterprise) • Supply and demand of • Also called a Free Market goods and services Economy or Free Enterprise determine what is produced Economy and the price that will be • Decisions are made charged. according to law of supply & demand

Section 1- Market Economies • Market Economies revolve around people making decisions in their own self interest • Private Property Rights and ownership enable this • Private Property Rights- rights to groups and individuals who own property • Ex. Factories, offices, clothes, music

• Individuals in a market economy act in their own self interest when making economic decisions • Producers make goods and services to make as much profit as possible

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What Is an Economy?

Capitalism

Capitalism features private ownership of businesses and marketplace competition. It is the same as a free enterprise system. The political system most frequently associated with capitalism is democracy.

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Market Economies Include Limited Gov’t Involvement • All four factors of production are privately owned. Capitalism • Most Economies including ours, has limited gov’t involvement • Purest of capitalism is laissez faire, no gov’t involvement in the market place • It does not exist in the real world

Advantages and Disadvantages of Market Economy • • • • • • •

AdvantagesEconomic and political freedom Ability to make as much profit as possible DisadvantagesThey only invest in profit No military or social service spending Unable to work=no help Just rich and poor wage gap

Section 1- Mixed Economies • Most nations are a mix of traditional, command, and market economies • Ex. U.S., gov’t protects consumers and regulates some areas of business • Even command economies have mixed elements ex. China

• U.S. is more of a market system, contains private ownership and markets • European nations economies are more mixed than ours • European nations own key parts of their industry and in turn provide free healthcare and social assistance

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What Is an Economy?

Continuum of Economic Systems

When studying different economic systems, it is best to view them on a continuum, as depicted here. Where on the continuum would you place the United States? Canada? North Korea? What do you think is the most effective economic system? 19

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What Is an Economy?

Economies in Transition

Many countries are in transition from either communism or socialism to capitalism.

Privatization is a common aspect of transition from a command economy to free enterprise system. Privatization means state-owned industries are sold to private individuals and companies.

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Fall of Communism=Free Markets in Eastern Europe

• Eastern Europe use to be under communist rule and Soviet influence • Early 90’s Soviet Empire falls and eastern European nations begin to use market economics slowly

Two Trends In Moving Towards Mixed Economy • 1. Changes in Ownership• These nations use to nationalize industry, gov’t owned and operated • Now these former command economies have moved toward privatization- individually owned by a person or group. • This creates more efficiency and motivation to use resources wisely

2. Increasing Global Ties • Globalization or Global Economy- opening your market and other to foreign investment • Ex. U.S. and China

Reasons for Globalized Economies • Nations are investing in each other’s markets, stocks, bonds, etc. due to better telecommunications (internet and world wide web). • Technological advancements in transportation of goods

Economic Goals 1. 2. 3. 4. 5. 6. 7.

Economic Efficiency (max value, min waste) Economic Equity (fairness) Economic Freedom Full Employment Economic Growth (GDP, health, literacy, . . .) Security (defense, safety net) Price Stability

Goals are not necessarily mutually compatible!

ELM 2: Opportunity Cost

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Characteristics of Free Enterprise Several key characteristics make up the basic principles of free enterprise.

1. Economic Freedom People may choose their jobs, employers, and how to spend their money. Businesses may choose what products to sell and how much to charge for them.

4. Profit Motive The drive for the improvement of material well-being.

2. Voluntary exchange The right to decide what and when you want to buy and sell a product. 3. Private property rights The right to control your possessions as you wish.

5. Competition Producers and sellers compete with one another to attract consumers, while lowering costs. Consumers compete with one another to obtain the best products at the lowest proces.

Roles of Consumers and Producers in Market Economies • Consumer- spend money as they wish, enter into business with who they want, and buy work and services of others • Producers- Decide what goods and services to sell and use limited resources to make as much money as possible

American Free Enterprise • The Role of the Consumer: – The fundamental purpose of the free enterprise system is to give consumers the freedom to make their own economic choices. – Consumers make their desires known through their economic dealings with producers. – When consumers buy products, they signal to producers to produce more of that particular item. – Consumers can also make their wishes known by joining interest groups – private organizations that tries to persuade public officials to act or vote according to the members’ wishes.

– Usually form around issues like taxation, aid for farmers, and land use.

Role of Government • Protector: enforces laws against – False and misleading advertising – Unsafe food and drugs – Environmental hazards – Discrimination

Provider: all levels of government provides goods and services for citizens. -national defense, funds for road construction -education systems, parks, libraries, sanitation, etc..

Roles of the Government cont…. • Regulator • -preserving competition in the marketplace • -regulates the following industries – Banking, nuclear power, communications Consumer: All levels of government consume resources to fulfill their over roles in the economy.