ECONOMIC SYSTEMS Chapter 5 ECONOMICS Economics: The social science that examines how societies use scare resources to produce and distribute goods and services that satisfy peoples’ wants and needs. Economic System: The way a society uses resources to satisfy its people’s needs and wants. Macroeconomics- Economics on a national and global scale. This concerns economic decisions made by the governments. Microeconomics—focuses on economic decisions made by individual people and businesses. Economic Resources Societies vary in the Quality and Quantity of resources they have , but all have economic resources. •Land and Natural Resources •Power •Communication •Factories and Equipment •Productive Workers •Money to fund government programs, or to trade with other countries. Scarcity and Opportunity Cost •Because society’s wants are unlimited and resources are limited, it cannot supply everything its people desire. •This is called scarcity and it is the fundamental problem that all economic systems try to solve. •Every economic choice has an Opportunity Cost. •(When resources are used for one economic option, they cannot be used for other options.) In establishing an economic system a society must answer the following three questions…. •What goods and services will we produced? •How will these goods and services be produced? •Who should share the goods and services that are produced? Traditional Economy •The three economic questions are answered based on traditional customs and beliefs. •Families or groups live the way their ancestors did. •There is little technology and industry. --These societies are very rare today. A few still exist in rural, nonindustrial areas in various parts of the world. Command Economy In this system, decisions about what to produce, how and for whom are decided by a central government, causing this to be know also as a controlled economy. ---The government control all the economic resources and make all decisions. ---Individuals that live in Command Economies have nothing to say about what is produced or how it is produced. Market Economy *In this system, decisions about what to produce, how, and for whom are decided by individuals acting in their own self-interest. *Individual and private companies own and control economic resources such as businesses, factories, and farms. They decide for themselves what goods to make and what services to offer. -- The idea of free market is essential. Mixed Economy *A mixed economy is a combination of the command and market economic systems. *There is limited governmental control. The idea of a free market is combined with some degree of government control. Most of the world’s economies fall into this category. Economic goals of the U.S. •Growth- an increase in the amount of goods and services produced over time. •Efficiency- Wise use of limited resources. •Stability- A steady level of economic well being, without wild up and downs. •Justice—An economic system that treats all citizens fairly. •Security– Support systems for citizens who face economic hardships through no fault of their own. Fundamental Characteristics of the U.S. Economy •Private Property. Individuals and groups are allowed to own economic resources such as land and businesses. Consumers own the goods that they purchase. •Freedom of choice. In the US economy, consumers freely choose how to spend their money. •Free Enterprise. The US economy is often called a system of private enterprise or free enterprise. Individuals are free to own and control business enterprises. •Limited government control Helps motive competition. In a free enterprise system, businesses are allowed to compare for profit with a minimum of government regulation. Limited governmental control over economic matters is because individual economic freedom is so highly valued.