CHAPTER ONE THE PATH TO CONTEMPORARY ECONOMIC SYSTEMS An economy is the wealth-producing segment of society Wealth is the sum of one’s assets minus one’s total liabilities liabilities such as debt People have needs and desires which are satisfied by the production of goods and services Societies that can barely afford to fulfill the basic needs of food shelter shelter and clothing are considered poor Economies like that of the United States sustain their people’s needs and far beyond beyond allowing them to afford luxuries that people of other countries cannot A society creates wealth by producing goods and services services Goods include such objects as apples clothes toys houses airplanes and roads Services are things that people do for others for example gymnastics lessons teaching banking military service music concerts and dental care Money defines the value of a product or service It is the means by which two unlike products or services are exchanged 6
The Path to Contemporary Economic Systems keeps Money the economy productive People People who make and sell things earn money to buy more materials to make more things People who provide services make money that allows them to buy goods and services from others THREE MAIN ECONOMIC SYSTEMS People who provide services for others such as gymnastics instructors are part of the service industry A traditional economy the earliest economic system is overseen by a sovereign ruler In traditional economies economies social roles are rigid and there is almost no hope for personal advancement In a command economy the government owns the means of production of goods and services and its central planners control all economic activity Central planners decide what is to be produced how much will be produced and 7 7
Corporations Nonprofits and Labor Unions how both materials and finished finished goods will be distributed distributed Central planners set prices mainly on the basis of how efficiently goods can be produced Past societies with command economies accomplished tremendous achievements For example example the Egyptian pyramids were built under a command command economy At the time the Pyramids of Giza Egypt were built Egypt had a command economy Supporters of command command economies say that government control overcomes market failures creates a more socially equal system and prevents mass unemployment unemployment However this comes at a cost of personal freedom Individuals have little or no choice in what they produce or what they earn A market economy another common economic system system is driven by supply and demand Demand is the quantity quantity of a product or service that people want and supply is the amount that the market can provide Individuals seek financial reward by supplying the things that others are willing to buy Throughout history market economies have proved more effective in creating wealth than command 8
The Path to Contemporary Economic Systems Opportunity Costs The issue of limited resources is central in economics If you spend money on one thing you won’t have money for something else The opportunity cost is what you give up to get what you want Making good economic decisions depends on your priorities For instance you may be scheduled to work but a friend invites you to a music concert If you decide to go to the concert the opportunity cost is the lost wages If you go to work the opportunity cost is missing out on a show In this case the smarter economic decision is going to work because the opportunity cost of missing a concert is less than the missed opportunity to earn money Opportunity costs force us to think about what really matters like earning money and putting the money in a savings account instead of spending it on a concert ticket 9
