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Chapter 6: Economic Systems�Opener

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Essential Question

How does a society decide who gets what goods and services?

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Chapter 2, Opener

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Section 1: Traditional Economy

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Chapter 2, Opener

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economic system: the structure of methods and principles that a society uses to produce and distribute goods and services
factor payment: the income people receive in return for supplying factors of production
profit: the amount of money a business receives in excess of expenses
safety net: a set of government programs that protect people who face unfavorable economic conditions
standard of living: level of economic prosperity
innovation: the process of bringing new methods, products, or ideas into use
traditional economy: an economic system that relies on habit, custom, or ritual to decide the three key economic questions

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Chapter 2, Opener

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Guiding Questions

Section 2: The Free Market

What are the characteristics of a free market economy?

Free markets are characterized by economic freedom and the promotion of growth and stability.

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Chapter 2, Opener

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laissez faire: the doctrine that government generally should not intervene in the marketplace
private property: property that is owned by individuals or companies, not by the government or people as a whole
mixed economy: a market-based economic system in which the government is involved to some extent
economic transition: a period of change in which a nation moves from one economic system to another
privatization: the process of selling businesses or services operated by the government to individual investors, and then allowing them to compete in the marketplace
free enterprise system: an economic system in which investments in firms are made in a free market by private decision rather than by state control

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Chapter 2, Opener

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Chapter 2, Opener

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Guiding Questions

Section 3: Centrally Planned Economies

What are the characteristics of a centrally planned economy?

Centrally planned economies are characterized by government ownership of most or all of the economy.

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Chapter 2, Opener

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centrally planned economy: an economic system in which the government makes all decisions on the three key economic questions
command economy: another name for a centrally planned economy
socialism: a range of economic and political systems based on the belief that wealth should be distributed evenly throughout society
communism: a political system in which the government owns and controls all resources and means of production and makes all economic decisions
authoritarian: describing a form of government which limits individual freedoms and requires strict obedience from their citizens

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Chapter 2, Opener

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Section 4: Mixed Economies

What are the characteristics of a mixed economy?

Mixed economies are characterized by some government control and the free market system.

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Chapter 2, Opener

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Chapter 2, Section 1

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Chapter 6: Economic Systems�Section 1

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Introduction

What goals and values affect how a society answers the key economic questions?

Each society is guided by its economic system, which affects the way in which it does business within the society itself and with other societies.
A society’s values, such as freedom or tradition, guide the type of economic system that society will have.

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Chapter 2, Section 1

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Three Economic Questions

As a result of scarce resources, societies must answer three key economic questions:

What goods and services should be produced?
How should these goods and services be produced?
Who consumes these goods and services?

How a society answers these three questions defines the type of economic system that �society has.

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Chapter 2, Section 1

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Questions 1 and 2

What goods and services should be produced?

Each society must decide what to produce in order to satisfy the needs and wants of its people.
Because resources are limited, each decision that a society makes about what to produce comes at an opportunity cost.

How should goods and services be produced?

As a society decides how to produce its goods and services, it must consider how best to use its land, labor, and capital.

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Chapter 2, Section 1

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Combining Factor Resources

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Chapter 2, Section 1

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Question 3

Who consumes goods and services?

This question is largely determined by how societies distribute income.
Through factor payments, including profits, societies can determine who will be the consumers of the goods and services produced.

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Chapter 2, Section 1

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Economic Efficiency

Societies answer the three economic questions based on the importance they attach to various economic goals.

Because resources are always scare, societies try to maximize what they can produce using the resources they have.

If a society can accurately assess what to produce, it increases economic efficiency.

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Chapter 2, Section 1

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Economic Growth

A society also strives for economic growth. A nation’s economy must grow so it can provide jobs for the new people joining the workforce.

A nation strives to improve its standards �of living.
Innovation plays a huge role in economic success as well.

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Chapter 2, Section 1

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Traditional Economies

The oldest and simplest economic system is known as a traditional economy.

Traditional economies rely on habit, custom, or ritual and revolve around the family. There is little room for innovation or change.

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Chapter 2, Section 1

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Traditional Economies, cont.

Societies with traditional economies are successful if they meet their own needs.

In many cases, these communities lack modern conveniences and have a relatively low standard of living.

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Chapter 2, Section 1

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Comparative Systems Assignment

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Chapter 2, Section 2

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Chapter 2, Section 2

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Natural Resources

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Chapter 2, Section 2

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Chapter 6: Economic Systems�Section 2

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Self-Regulation, cont.

According to Smith, consumers will respond to the positive incentive of lower prices by buying more goods because spending less money on a good lowers the opportunity cost of the purchase.

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Chapter 2, Section 2

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What are Incentives?

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Chapter 2, Section 2

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Competition

Checkpoint: Why is competition important to the free market?

Firms seek to make higher profits by increasing sales.
Because of competition among other firms, though, increasing sales is not always possible.
Self-interest and competition work together to regulate the marketplace.
Smith called this self-regulating mechanism “the invisible hand of the marketplace.”

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Chapter 2, Section 2

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Advantages of a Free Market

Under ideal conditions, free market economies meet the following economic goals:

They respond to rapidly changing conditions.
They have a large degree of economic freedom.
They encourage economic growth.
They lend themselves to consumer sovereignty.

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Chapter 2, Section 2

What free market principle does �this cartoon illustrate?

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Chapter 6: Economic Systems�Section 3

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Objectives

Describe how a centrally planned economy is organized.
Distinguish between socialism and communism.
Analyze the use of central planning in the Soviet Union and China.
Identify the disadvantages of a centrally planned economy.

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Chapter 2, Section 3

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Chapter 6: Economic Systems�Section 4

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Introduction

What are the characteristics of a mixed economy?

A mixed economy is characterized by:

A market-based economy with some government intervention
Government helps societies meet needs that would be too difficult for them to meet under a totally free market economy, such as education
Government protects property rights and ensures that exchanges in the marketplace are fair

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Chapter 6, Section 4

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The Rise of Free Markets

Even free market thinkers like Adam Smith recognized the need for a limited degree of government involvement in the economic marketplace.

In a mixed economy, the market is free but has a certain degree of government control.

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Chapter 6, Section 4

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The Rise of Free Markets, cont.

Checkpoint: What is one reason the government plays a role in the economy?
The government:

Provides national defense and public education
Protects private property
Ensures fair exchanges in the marketplace

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Chapter 6, Section 4

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Government in the Market

Governments buy labor in the factor market to have employees help run its programs.
Governments purchase goods and services from firms in the product market.
Governments also collect taxes from both households and firms.

Checkpoint: How are governments involved in the product market?

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Chapter 6, Section 4

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Comparing Mixed Economies

Most modern economies are mixed economies.

The figure below shows a continuum of mixed economics in today’s world.
Why is China a little bit farther to the right on the diagram below than Cuba?

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Chapter 6, Section 4

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North Korea and China

North Korea represents one extreme of the continuum.

North Korea’s economy is almost totally dominated by the government. The government owns all the property and output equipment.

China, on the other hand, is closer to the center of the continuum because China is going through an economic transition toward privatization of state-owned firms.

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Chapter 6, Section 4

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Hong Kong

Hong Kong represents one of the world’s freest markets.

In Hong Kong, the private sector rules.
The government protects private property and rarely interferes in the free market, aside from establishing wage and price controls on rent and some public services.

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Chapter 6, Section 4

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The United States

The United States is a mixed economy whose foundation is the free market.

It is characterized as a free enterprise system.

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Chapter 6, Section 4

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Government Intervention

The American government intervenes in the economy by:

Keeping order
Providing vital services
Promoting general welfare

Federal and state laws protect private property.

The marketplace operates with a limited degree of government regulation.

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Chapter 6, Section 4

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American Economic Freedom

The United States enjoys a high level of economic freedom.

Foreign investment and free trade is encouraged
The banking industry operates under relatively few restrictions
Foreign-owned banks have few additional restrictions

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Chapter 6, Section 4

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Review

Now that you have learned the characteristics of a mixed economy, go back and answer the Chapter Essential Question.

How does a society decide who gets what goods and services?

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Chapter 6, Section 4