Economic Systems
Chapter 2
Section 1
Economic System- the way society uses its
scarce resources to satisfy unlimited wants
 Three systems- Traditional, Command,
Market Economies

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


What do you think the advantages and
disadvantages of this type of system may
be?
Advantages and Disadvantages of
Traditional Economy
Advantage- answers the three essential
economic questions, What- enough to
survive, How- follows tradition, For Whomdivided 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

Market Economy
Individuals choice
decides what, how,
and for whom to
produce.
 Consumer and
producer drive this
economy

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

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

Adam Smith’s Invisible Hand
Theory

When you make an
economic decision you
are acting in your
own, best self interest,
but at the same time
you are unknowingly
helping someone out.
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

Socialism and Communism
These political
systems are the best
ex. of command
economies
 Both were influenced
by the historian and
economist Karl Marx

Karl Marx
He believed the
worker would
overthrow the rich
overtime and
transfer the
ownership of land
and industry to
the people.
 He believed that
this would create
a classless society.

Marx and Engels
Both Marx and Friedrich
Engels laid out their
economic philosophy in
their book Communist
Manifesto, in 1848
 Marx wrote Das Kapital in
1867 to display his
philosophy further.
 Marx’s theories do not
work! He was trying to
create a Utopian Society

Socialism and Communism
Socialism- economic system where the
gov’t owns some or all of the factors of
production, small business is individually
owned
 Democratic Socialism- gov’t is put in place
by the people, gov’t owns basic industries,
but some are privately owned. Ex. Most
European Nations


Communismextreme form of
socialism. Gov’t
owns all factors
of production,
economy is
controlled by
communist
party, and has
absolute
authority. Ex
North Korea
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
Section 3- 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

Markets
Any place or situation where people have
the right to buy and sell as they please,
allows the enhancement of their own self
interest.
 Markets can only work if we have well
defined property rights
 Ex. Title to a car, copyrights, even receipts


Without
such
property
rights and
laws the
buyer could
not trust the
seller
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

Voluntary Exchange in Markets
This is where both
buyer and seller
believe the worth of
trade outweighs what
they are giving up
 Ex. Car salesman and
buyer, dealership
makes profit

Competition and Consumer
Sovereignty
Competition creates quality of goods and
services and competitive prices
 Consumer Sovereignty- Consumers have
ultimate control over what is produced,
because they are free to buy what they
want and reject what they don’t want
 What would happen if we did not have
competition between sellers?

Specialization and Markets
We tend to specialize our time and effort
into a job we can do best
 In turn, we take our wages to support our
lifestyle
 This allows people to trade money for
more efficiently made goods and services
 Ex. Teacher vs. Farmer
 Refer to Circular Flow Model

Product Market
Market for
goods and
services
 Household buys
goods and
services
businesses sell,
then they take
their revenue to
pay to keep
their business
going.

Four Factors Market
Businesses
purchase the four
factors(land, labor,
capital,
entrepreneurship)
they need to sell
goods and services
 In this market
businesses are the
buyers and
households are the
sellers.

Advantages and Disadvantages of
Market Economy
Advantages Economic and political freedom
 Ability to make as much profit as possible
 Disadvantages They only invest in profit
 No military or social service spending
 Unable to work=no help Just rich and
poor wage gap

Section 4- 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

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 privatizationindividually owned by a person or group.
 This creates more efficiency and
motivation to use resources wisely


Why would a private business have more
incentive to be more efficient and more
productive compared to a business in a
command economy?
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
