ECON 1000 Lecture Notes - Lecture 3: Economic System, Critical Role, Social Capital

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30 Aug 2018
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Chapter 3: Capitalism vs. Socialism
1. Economic system: rules/methods put in place by a society to determine “what,” “how,”
and “for whom” good are produced
a. The way these questions are answered determines the economic system
b. Subfield of economics that compares and contrasts the structure and
performance of different economic systemscomparative economic systems
c. Every economic system contains 4 primary institutions
i. Householdsultimate consumers of G&S; primary suppliers of labor
ii. Firmsinstitutions that transform FOP into G&S
1. Factors of production (FOP)land, labor, capital, used to produce
the G&S that we benefit from consuming
2. Natural assetsnatural resources and fossil fuels, naturally
occurring vegetation, water, etc.
3. Produced assets: industrial capital (machines, factories and
inventories of finished goods) and social capital
(transportation/communications/infrastructure and educational
institutions)
4. Human capital: skills, education, and training which individuals in
the labor force possess
iii. Marketcollection of all potential buyers and sellers of a G&S
iv. Governmentdecision making institution with the legal authority to
impose restrictions/mandates on the behavior of other decision-makers
1. At a minimum, government plays a critical role in defining and
enforcing property rights & contracts (tasks which are essential
for markets to function)
a. Contracta legal document which specifies what different
parties must do, whatever the external circumstances and
provides enforcement of compensation for non-
performance
2. 2 Types of Economic Systems
a. Capitalism: economic system in which FOP are privately owned and operated for
a profit (i.e. capitalists freely decide how to use and subsequently get to keep
the surplus generated by the FOP that they own)
i. Forerunner to capitalism was feudalismeconomic system where only
the aristocratic nobility could own land
1. Land ownership was usually acquired through conquest or
inheritance
2. Society was divided between nobles at the top and serfs/peasants
at the bottom
3. As the “pool of potential land owners” expanded both formally
and informally, capitalism slowly replaced feudalism
ii. Defined by private ownership of resources and relies upon decentralized
decision making in free markets to allocate productive resources
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