Unit Three Economic System

• The latter illustrates the “free-rider”
phenomenon of public goods—both those who helped pay for the lighthouse and those who did not will enjoy the same amount of light. The “free-rider” problem can be eliminated if governments collect taxes and then provide public goods.
▪
3.2 Free-Market Economy
Free-Market Economy, economic system in which individuals, rather than government, make the majority of decisions regarding economic activities and transactions (see Capitalism)
Unit Three Economic System
New Words
mechanism
utility
Distribution
toxic
eliminate
rural
forbid
ethnic
customs
proponent
1.Economic System
• An economic system is a mechanism (social institution) which deals with the production, distribution and consumption of goods and services in a particular society. The economic system is composed of people, institutions and their relationships to resources.
Customs govern the economic decisions that are made
❖ Technology is not used in traditional economies
❖ Farming, hunting and gathering are done the same way as the generation before
The U.S. has a market economic system. When you finish school, you may go to work where you choose, if a job is open. You are also free to go into business on your own. Suppose that you decide to open a business.
Economic activities are usually centered toward the family or ethnic unit
Men and women are given different economic roles and tasks
3.Market Economic System
Government's role in a free-market economy also includes protecting private property, enforcing contracts, and regulating certain economic activities. Governments generally regulate “natural monopolihat all nations must make choices. This is a matter of resource allocation. When we allocate limited resources we make choices. The cost of these choices is known as opportunity cost.
Individuals are free to make economic decisions concerning their employment, how to use or accumulate capital, what expenditures to make, and whether to use their resources now or to save them for later consumption.
There, people living in an agricultural village still plant and harvest their own food on their own land. And the ways they produce clothing and shelter are almost exactly the same as those used in the past. Tradition decides what these people do for a living and how their work is performed.
▪ The success that you have will depend on the demand by consumers for your goods. You may do extremely well. But if people do not want what you are selling, you will go out of business.
• The principles underlying free-market economies are based on laissez-faire (non-intervention by government) economics and can be traced to the 18thcentury Scottish economist Adam Smith.
These are the questions all nations must ask when dealing with scarcity and eficiently allocating their resources. They are:
What to produce? How to produce? For whom to produce?
• Public goods, which include defense, law and order, and education, have two characteristics: consumption by one individual does not reduce the amount of the good left for others; and the benefits that an individual receives do not depend on that person's contribution
▪ Each nation and society thus must make choices and decision based upon there own values. If a society values meeting more wants and needs at the expense of freedom of choice then they may choose a system radically different
▪ A market economic system is one in which a nation's economic decisions are the result of individual decisions by buyers and sellers in the marketplace.
❖ As we have said, all nations must answer the question of scarcity. All nations and societies must allocate their resources in order to meet their needs. This is where the essential dilemma between unlimited wants and limited needs comes into play.
When making these choices and dealing with scarcity, resource allocation and opportunity cost , nations are answering what we have previously referred to as the three basic economic questions.
An example is a lighthouse. One individual's use of light provided by a lighthouse does not reduce the ability of others to use it. In addition, the lighthouse owner cannot restrict individuals from using the light.
2.1Characters of Traditional Economic System
Traditional economies are found in rural, non-developed countries
Some parts of Asia, Africa, South America and the Middle East have traditional economies
❖ According to Smith, individuals acting in their own economic self-interest will maximize the economic situation of society as a whole, as if guided by an “invisible hand.” In a free-market economy the government's function is limited to providing what are known as “public goods” and performing a regulatory role in certain situations.
2.Traditional Economic System
A traditional economic system is one in which people's economic roles are the same as those of their parents and grandparents. Societies that produce goods and services in traditional ways are found today in some parts of South America, Asia, and Africa.
❖ Economic systems are divided up into three basic types. These types are:
▪Command Economic ❖Market Economic
▪Systems
❖Systems
❖Traditional Economic Systems