U1C2 Economic Systems and Decision Making

1. U1C2Economic Systems and Decision Making Economics

2. Main Idea Scarcity is the situation that exists when there are not enough resources to meet human wants. An economic system is the way in which a society uses its scarce resources to satisfy its people’s unlimited wants.

3. Essential Question How does a society decide the ways to use scarce resources to meet unlimited wants?

4. EconomicSystem Traditional Economy: age-old customs and beliefs Market Economy: individuals and businesses Command Economy: government

5. Key Concepts • to address scarcity, societies must answer 3 questions: • What should be produced? • How should it be produced? • For whom should it be produced? • the answers shape the economic system a society has 3 types: traditional economy, command economy, and a market economy

6. Traditional Economy Families, clans, or tribes make economic decisions based on customs and beliefs that have been handed down from generation to generation, with the one goal being survival everyone has a role; there is no deviation; the good of the group takes precedence over individual desires

7. Command Economy government decides what goods and services will be produced, how they will be produced, and how they will be distributed individual consumers are rarely considered government usually owns all means of production: all resources and factories Examples: North Korea, Cuba; before communism’s collapse in Europe-Soviet Union, Poland, East Germany

8. Market Economy based on individual choice, not government directives producers decide what goods or services they will offer individuals act in own self interest when they make economic choices; as they seek to serve their own self interest, they also benefit others

9. Characteristics of Traditional Economies All societies were once traditional economies tends to be inefficient and does not adapt to change Advantages: clearly answers 3 economic questions, little disagreement over economic goals and roles Disadvantages: because they are based on ritual and custom, they resist change; productivity is low; lower standard of living Cell phones are splitting up traditional economies

10. Command Economies government controls command economies today North Korea: many command elements Many disadvantages: inefficient, lack of political freedom all features of economy socialism communism

12. Socialism and Communism Socialism: economic system in which the government owns some or all of the factors of production, developed by the ideas of Karl Marx Communism: extreme form of socialism-no private ownership of property, little or no political freedom-authoritarian socialism

13. Comparing Economic Systems Communism Socialism Market System government owns resources government planners decide how resources are used government makes all economic decisions government owns basic resources: the rest are privately owned government planners allocate basic resources; market forces allocate privately-owned resources all resources are privately owned market forces allocate resources government’s role limited-mostly to ensure market forces are free to work

14. Karl Marx great impact on 20th-century economic and political thinking 1818-1883 German philosopher, historian, and economist major accomplishment: detailed analysis of capitalism and foundation for socialist economic theory in The Communist Manifesto (1848) & Das Kapital(1867-1894) famous quote: “Workers of the world unite; you have nothing to lose but your chains.” influenced: Russian Revolution, 1917; Chinese Revolution, 1949

15. Command Economies Today no pure command economies today, but North Korea has mostly command elements late 1990s, early 2000s scarce food caused millions of N. Koreans to die from hunger and malnutrition economy actually shrank during this time 2003: some restrictions relaxed to revive country’s economy

16. Impact of Command Economies advantages: seek to provide for everyone, sick, old, no longer productive In practice, a lot of disadvantages: economic decisions misguided, low worker motivation, resources not used wisely, prices set well below that which would be set in a market system light bulbs in Soviet Union estimates suggest that policies of command economies are responsible for more deaths than two world wars

17. Fundamentals of a Market Economy Government Involvement: minimal government intervention Voluntary Exchange: buyer & seller each believe benefits outweigh costs Profit: sellers are free to attempt to maximize profits Competition: sellers are free to get the business of others Consumer Sovereignty: buyers can decide whether to buy or not Specialization: buyers & sellers can concentrate on areas where they think they have an advantage Private Property: buyers & sellers are free to use & own private property

18. limited government involvement voluntary exchange, competition, consumer sovereignty market economy specialization private property rights

19. Impact of Market Economies • Advantages: economic and political freedom; profit • Disadvantages: provides no mechanism for public goods and services, like defense; cannot provide security to those who, because of sickness or age, cannot be economically productive; cannot prevent the unequal distribution of wealth

20. many different types: USA-market oriented France, Sweden- more command oriented move away from command elements: privatization of resources increasing globalization today’s mixed economies trends in modern economies modern economies

21. Today’s Mixed Economies mixed economy: elements of traditional, command, and market economies is most common type U.S. has a market economic system with command and traditional elements France & Sweden are mixed economies with stronger command elements than the U.S.; in France government owns many industries and citizens receive health care/education, in Sweden, government owns one third of businesses and citizens get cradle to grave social benefits

22. Trends in Modern Economies economies change and are always changing nationalize: to change from private to government or public ownership privatize: to change from government or public to private ownership economic globalization: foreign trade is higher today than ever before; economic partnerships among nations serve the interests of both parties

23. Contrasting Economies: North Korea and South Korea North Korea: command economy, mostly military spending by government, low GDP, isolationist country with little trade, famine is common South Korea: market economy, increasing GDP