Chapter 2: Economic Systems

Even in free markets, governments will

- Maintain the rule of law - Create public goods and services such as roads and education - Step in when the market gets things wrong (e.g., setting minimum wage, establishing environmental standards)

In a free-market (capitalist) economy, individuals own the factors of production:

- Privately owned businesses produce products. - Consumers choose the products they prefer causing the companies that product them to make more profit.

Market

Any situation that brings together buyers and sellers of goods or services.

Two types of planned economies?

Communist economy and socialist economy

Market economy

Decisions about what products are available and at what prices are determined through the interaction of supply and demand.

Command economy

Economic effort is devoted to goals passed down from a ruler or ruling class. Resources and businesses are owned by the government.

Types of Economies

Includes all production of goods and services, all buying and selling, all employment.

Jane Doe is a shop owner in the fictional country of Xanadu. Every month the government's planning ministry sends her a large booklet (which resembles a phone book) regulating the price of essential commodities including milk, flour, and eggs. In response to these regulations Jane Doe has reduced her inventory of essential goods and switched to selling luxuries such as cakes, pies, and soft drinks. Luxury goods are not price controlled. Does Jane Doe reside in a command economy? Why or why not?

Jane does not reside in a command economy. She owns her own business and is free to make some production and price decisions.

You are the leader of a revolutionary movement which has recently overthrown the government of the tiny country of Tropico. During the 3rd Party Congress, which was held shortly before your glorious victory, the party committee decreed that "to free Tropico's struggling masses from the jackboots of capitalism and reactionary imperialism, it is necessary to immediately enforce a command economy upon realization of our final victory." Which of the following actions would betray your mandate to create a command economy in Tropico?

Maintain private ownership, but legalize labor unions which will now be free to bargain with private businesses for improved wages and benefits.

The economy of Atlantia is defined by the private ownership of the means of production by Atlantia's citizens. While owners are usually free to utilize their property as they see fit, the government does intervene to ban certain harmful products (i.e. addictive drugs, lead paint, etc) from entering the market. Atlantia's parliament has recently passed a minimum wage law setting minimum hourly compensation at $5.00 per hour. Atlantia is an example of a ________ economy.

Mixed market.

Free market

One in which the government does not intervene in any way.

Competitive market

One in which there is a large number of buyers and sellers, so that no one can control the market price.

Mixed market

Private ownership of the means of production along with limited government interventions.

The primary distinction between a free and command economy?

The degree to which the government determines what can be produced and what prices will be charged.

Which of the following is a defining feature of free markets?

The government does not interfere in any way with the economic decisions of buyers and sellers.

What does it mean that market economies are based on private enterprise?

The means of production (resources and businesses) are owned and operated by private individuals or groups of private individuals.

A true communist economy

There is no private property—everyone owns the factors of production.

A socialist economy

There is some private property and some private control of industry.

Buyers and sellers can be either individuals or businesses. T/F

True

Economic systems determine the following:

What to produce? How to produce it? Who gets it?

Market economies are based on private enterprise, which means

economic decision-making happens through markets

In a planned economy, government determines the prices for goods and services, and:

the government also determines what goods will be produced.

A competitive market is one in which:

there are a large number of buyers and sellers.