ECONOMIC SYSTEMS AND DECISION Economics - Chapter 2 MAKING

[Pages:26]ECONOMIC SYSTEMS AND DECISION MAKING

Understanding Economics Chapter 2

ECONOMIC SYSTEMS

Chapter 2, Lesson 1

ECONOMIC SYSTEMS

Traditional Market Command

Mixed

! Economic System ? organized way a society uses its resources to provide for the wants and needs of its people

! This is how it answers the three questions, WHAT, HOW and FOR WHOM.

TRADITIONAL ECONOMY

! Traditional economy ? economic system in which the allocation of scarce resources is the result of ritual, habit or custom.

! People's roles are defined by the customs of their elders and ancestors.

! Job or roles are often handed down generation to generation. ! Decisions are made according to historical pattern. ! Often have a tradition of sharing and can survive as long as there

are skilled hunters and farmers ! The three questions of WHAT, HOW and FOR WHOM are answered

according to tradition ? things are done they way they were always done. ! Examples: African Mbuti, Australian Aborigines or Inuit of North America

TRADITIONAL ECONOMY

Advantages

!Roles are clearly defined.

!Family and community ties are strong.

Disadvantages

! Change and new ideas are discouraged, so methods of production are inefficient.

! Stagnation ? lack of progress

! Choice of consumer goods is limited.

! You are not allowed to choose a role different from the one given to you by tradition.

! Lower standard of living

COMMAND ECONOMY

! Command economy ? economic system characterized by a central authority (government) that makes most of the major economic decisions.

! A central authority or government makes the decisions WHAT, HOW and FOR WHOM to produce.

! This central authority can be a king, dictator, president or tribal leader or the government led by them.

! Characterized by socialism ? economic system in which government owns factors of production and has a role in determining what and how goods are produced.

! In a "pure" command economy, the government makes ALL decisions about WHAT, HOW and FOR WHOM.

! Most command economies severely limit private property rights. (People cannot own homes and businesses.)

! Some governments are generous with their country's wealth and share it with the people. Some governments hoard the wealth for the leader, and the people are left poor.

COMMAND ECONOMY

! Command economy ? economic system characterized by a central authority (government) that makes most of the major economic decisions.

! Decisions made by the government are not necessarily made for the people.

! Examples of "pure" command economies: Cuba, North Korea, Venezuela

! There are few examples of "pure" command economies as many of these countries have transitioned to capitalist economies. (Ex: Soviet Union)

COMMAND ECONOMY

! Advantages:

! Can change direction quickly

! USSR went from agricultural to industrial in a few decades in the early 1900s.

! Governments may provide goods and services some people cannot otherwise afford.

! Universal healthcare, free education

! Equality for the population

! The majority of the population has the same income and same standard of living ? this is called income equality.

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