Topic 3: Economic Systems

• Scarcity


  The situation that exists when there are not enough resources to meet human wants
• Economic system


  The way in which a society uses its scarce resources to satisfy its people's unlimited wants
• How does a society decide the ways to use scarce resources to meet unlimited wants? Its economic system determines what to produce, how to produce, and for whom to produce
• Although every country today uses a mixture of economic systems, some mixed systems provide more economic and political freedom and create more wealth than others
• Per capita GDP


  A measure of the total output of a country that takes the gross domestic product (GDP) and divides it by the number of people in the country
• How do the economies of North Korea and South Korea compare?

  See the Case Study on pages 64–65
• Types of economic systems

  • Traditional economy
  • Command economy
  • Market economy
• 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
• Command economy


  An economic system in which the government decides what goods and services will be produced, how they will be produced, and how they will be distributed
• Market economy


  An economic system that is based on individual choice, not government directives
• In a market economy, individuals act in their own self-interest when they make economic choices. However, as they seek to serve their own interests, they benefit others
• When you make economic decisions you act in your self-interest, but you are "led by an invisible hand" to promote the interests of others
• The one great advantage of a traditional economy is that it so clearly answers the three economic questions
• Traditional economies have several major disadvantages, too. Because they are based on ritual and custom, traditional economies resist change
• Around the world, traditional economies are under pressure from the forces of change
• There are no pure traditional economies today
• Centrally planned economy


  A system in which the society's leaders, usually members of the central government, make all economic decisions
• Socialism


  An economic system in which the government owns some or all of the factors of production
• Communism


  A more extreme form of socialism in which there is no private ownership of property and little or no political freedom
• Authoritarian


  Requiring absolute obedience to authority
• Democratic socialism is established through the democratic political process rather than through the violent overthrow of the government
• Private property rights


  The rights of individuals and groups to own property
• Market


  Any place or situation in which people buy and sell resources and goods and services
• Laissez faire


  The principle that the government should not interfere in the economy
• Capitalism


  An economic system based on private ownership of the factors of production
• Voluntary exchange


  A trade in which the parties involved anticipate that the benefits will outweigh the cost
• Profit


  A financial gain from a business transaction
• Competition


  The rivalry between sellers to attract buyers
• Consumer sovereignty


  The ability of consumers to determine what is produced
• Specialization


  The concentration of production on a limited range of goods and services
• Circular flow model


  A model that represents economic activity in a market economy
• Product market


  The market for goods and services
• Factor market


  The market for the factors of production (land, labor, capital)
• Market economies


  • Have some degree of government involvement
  • Encourage voluntary exchange in markets
  • Characterized by competition and consumer sovereignty
  • Encourage specialization and markets
• Laissez faire


  The principle that the government should not interfere in the marketplace
• Capitalism


  An economic system that is based on private ownership of the factors of production
• Voluntary exchange


  A trade in which both traders believe that what they are getting is worth more than what they are giving up
• Profit


  A financial gain that a seller makes from a business transaction
• Competition


  The effort of two or more people, acting independently, to get the business of others by offering the best deal
• Consumer sovereignty


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