Chapter 2: Economic Systems

Disadvantages to a Free Market Economy?

There is no mechanism for providing things to help the overall welfare of society like national defense because the individual is the primary focus. -It cannot provide security to those who cannot work -It cannot do anything about equity or the unequal distribution of wealth -Large industrial companies or groups have no incentive to care about treatment of workers or the environment.

Privatize

To change from government/ public ownership to private ownership.

Nationalize

To change from private ownership to government/ public ownership.

Circular Flow Model

Tool that economists use to understand how market economies operate.

Who was Karl Marx?

(1818-1883) German Philosopher, Historian, and Economist.

Advantages to a Free Market Economy?

-more freedom from right to choose job and product -market can adapt to changes faster -bureaucracy is less cumbersome than in strong command -elections and press -resources will be allocating in an efficient manner because profit will be lost if it is not -Competition creates higher quality products and a diverse market.

The Six Economic Goals of the U.S.

1. Economic Freedom (you make choices about money, jobs, etc.) 2. Economic Efficiency (make the best use of scarce resources) 3. Economic Equity (share in the benefits of the market system as well as pay a fair share). 4. Economic Security (protect the economic well being of all citizens) 5. Economic Stability (full employment is 95%, prices are moderated) 6. Economic Growth (increase available goods and services to all)

Five Features or Fundamentals of the Free Enterprise System

1.Private Property and Entering into Contract are decisions that one can make if they choose. 2.Individual choices (You choose your career path, investing, etc.) 3.Engaging in Economic Competition 4.Making Decisions Based on Self Interest 5.We Have Limited Government

Reasons Global Trade is Expanding:

1.Trade Agreements have opened the world up to trade. 2.Efficient transportation 3.New Technology 4.Cross Border Partnerships (Samsung is a Japanese Company that partners with the US).

Voluntary Exchange

A trade in which both traders believe what they are getting is worth more than what they're giving up.

Competition

All actions sellers, acting independently, do to get buyers to purchase their products.

Global Economy

All economic interactions that cross international boundaries.

Traditional Economy

An economic system in which families, clans, or tribes make economic decisions based on customs and beliefs that have been handed down from generation to generation.

Mixed Economy

An economy that has elements of traditional, command, and market systems.

Market

Any place where people buy/ sell goods/ services

Centrally Planned Economy

Central government officials make all economic decisions.

What are the Disadvantages of a Command Economy?

Central planners are often ignorant and thus, make misguided decisions. There is no motivation for workers to work harder or use resources more wisely since there is no private property and there are set wages. Since prices are often set below market value, there are huge shortages that lead to stealing, etc. (light bulb example). Individual rights get put far behind the needs of the state and more people have died because of misguided command economic principles than of two world wars.

Market Economy

Economic System in which individual choice and voluntary exchange direct economic decisions.

Command Economy

Economic system in which the government decides what goods are produced, how, and to whom they will be distributed.

Capitalism

Economic system that is based on private ownership of factors of production.

Democratic Socialism

Established through the democratic political process where some industries are privately owned, and central planners make decisions for some industries such as health care.

What are the Advantages of a Command Economy?

Everyone is provided for and leaders can use resources to make things that may not have been profitable like medicine.

Profit

Financial gain that a seller makes from a business transaction.

Communism

Government owns all factors of production and there is little/ no political freedom.

Socialism

Government owns some/ all factors of production.

How did Karl Marx develop his beliefs?

Grew up in middle class Germany but became radical in college and kicked out of Germany so he settled in London where he met Friedrich Engels who told him of the slavery of the working class.

Factor Market

Market for factors of production.

Product Market

Market where goods/ services are bought/ sold.

Laissez Faire

Principle that government should not interfere in the marketplace.

Authoritarian

Requires absolute obedience to those in power.

Disadvantages to Traditional Economies

Resist change and thus are not as efficient as they could be. Furthermore, People do not get put in the job that best suits them. So there is a lower standard of living.

Private Property Rights

Rights of individuals and groups to own businesses and resources.

Consumer Sovereignty

The idea that consumers have ultimate control over what is produced because they're free to buy what they want and to reject what they don't want.

Economic System

The way a society uses its scarce resources to satisfy its people's unlimited wants.

Advantages to Traditional Economies

There is little disagreement and decisions are made very clearly in order to best benefit survival.

Specialization

Situation in which people concentrate their efforts in the activities they do best.

What did Karl Marx write?

The Communist Manifesto and Das Kapital because he thought that the whole factory system was based off of exploitation.

What is Karl Marx famous for?

The detailed analysis of Capitalism, foundation for socialist economic theory, influenced the Russian and Chinese revolutions.