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Introduction to Economic Systems

Introduction to Economic Systems. Chapter 2. Addressing Scarcity. Review of the three questions What should be produced? How should it be produced? For whom will it be produced? Economic Systems The way a society uses its scarce resources to satisfy the unlimited wants Traditional

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Introduction to Economic Systems

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  1. Introduction to Economic Systems Chapter 2

  2. Addressing Scarcity • Review of the three questions • What should be produced? • How should it be produced? • For whom will it be produced? • Economic Systems • The way a society uses its scarce resources to satisfy the unlimited wants • Traditional • Command • Market

  3. Traditional Economy • Based around the family, clan, or tribal use customs and traditions • Survival is the goal • Everyone has a set role and task • Division of labor by gender and age • Men hunter & herd • Women gather & farm • Children learn • Good of the group is key

  4. …Continued • Advantages • Produces what best meets survival needs • Methods always the same • Little disagreement over economics goods & roles • Disadvantages • Resistant to change • Less productive • Limited job opportunities • Limited material wealth, low standard of living

  5. …Continued • Traditional Economies Under Pressure • Encroachment of technology • Younger generations leaving traditional society • Commercialization of farming

  6. Command Economies • Governmental bodies decide what goods and services will be produced and how, and how they are distributed • Officials look at resources and needs and allocate resources according to judgments • Individual wants are rarely considered • Government owns the means of production • Cuba, N. Korea, and the former USSR

  7. …Continued • Concepts • Leaders make decisions • What will be produced • Wages workers earn • Economy is centrally controlled • Government Planning • Q. How does our government affect us? • Command Economics influenced by Karl Marx

  8. Karl Marx • Born in modern Germany in 1818, middle class family • Involved in radical politics during college • Settled in London after being exiled • Met Friedrich Engels and began developing economic theories • Concluded Industrial Revolution created “wage slavery” • Felt factory owners exploited workers as a commodity

  9. …Continued • 1848 published “the Communist Manifesto” • Between 1867-1894 published three volumes of “Das Kapital” • Discussed how history was a class struggle • Felt workers would eventually rise against labor bosses • Create public ownership • Theories have fallen out of favor, one of the most influential men of the 20th century 1818-1883

  10. Types Of Command Economies • Socialism • Government owns some if not all of the factors of production • Communism • No private ownership • Little political freedom • Authoritarian Socialism • Absolute obedience • Democratic Socialism • Government owns basic industries • Central decisions of government owned industries • Health care-equality of access

  11. North Korea • Once controlled by China, & Japan, and split after WWII • North Korea under communist control since 1950’s • Government diversion of funds to military ventures • 1million man army, nuclear arms programs • Food scarcity during the 1990’s and early 2000’s • North Korean economy was stinking during the 90’s • 2003 saw the relaxation on private ownership and markets • Experimenting with a free market

  12. Command Economy Impacts • Theoretical Advantages • Seeks to provide for everyone • Makes products that are needed • Practical Disadvantages • Central planning not in touch with local conditions • Misguided and wrong choices for an economy • Little improvements in productivity • Stagnation of wages/Unwise use of resources • Shortages of consumer goods • Individual needs and wants subordinate to that of the state • Deaths possibly out number those of both World Wars

  13. Market Economy • People’s economic behavior follows their self interest • MEs must provide property rights • Term: Market-a place or structure were people buy or sell

  14. Concepts • Private Property & Markets • Property should be well defined and protected by the law • Protection of rights of the buyer/seller • Car title • Deed to a house • Rights to music downloads

  15. …Continued • Limited Government Involvement • Laissez Faire- “leave things alone” • Capitalism • Private ownership of the factors of production • Producers will create goods and services that consumers demand • No need for government • Some government involvement is always there • Market economy at the purist form

  16. …Continued • Voluntary Exchange in Markets • Parties involved anticipate that benefits will outweigh risks • Parties exchange goods/services for money (usually) • Competition & Consumer Sovereignty • Competition is key • Customer Choice • Lowers prices, better value, etc. • Brand name vs. generic brand • Consumer Sovereignty • Hold real economic power • Demographic targeting

  17. …Continued • Specialization & Markets • Specialization • Concentration on area of advantage • Trade what most efficiently produced • Removes the need for self-sufficiency

  18. Circular Flow & Market Economics • Circular flow model • Visualization of market activity • Product markets • Market for goods & services • Set of activities • Purchase of goods & services • Factor markets • Markets for factors of production (land, labor, etc.) • Individual ownership (direct/indirect) • Businesses & Individuals are produces and consumers • Page 53

  19. Impacts of Market Economics • Advantages • Economic & Political Freedom • Free to buy and sell • Little government oversight • Free market choice • Profits • Reward • Reinvestments

  20. …Continued • Disadvantages • No provision of public goods & services • Example: National Defense • No protection for economically unprotected • Unequal distribution of wealth • Little government regulation can have adverse affects • Example: Environmental/Resource degradation

  21. Modern Economies in a Global Age

  22. Mixed Economies • Contain elements of Traditional, Command, & Market economies • Most common economic system • Greater government involvement & pressure for markets

  23. Life In A Mixed Economy • The Smith Farm • Family owned farm for generations • Modern machinery • Old customs-At the harvest everyone helps out • Smith’s & local farmers sell grain to market • On well maintained highways • Teenage children attend local high school • Oldest child works a part-time job in town for minimum-wage • Retired grandparents receive Social Security checks

  24. …Continued • Aspects in a Mixed Economy • Traditional • Harvest Customs • Command • Roads, public high school, minimum-wage job, & Social Security checks • Market • Private property & entrepreneurship, makes own decisions about what is the best way to make a living

  25. Types Of Mixed Economies • Driving force in the U.S. is a Market Economy • Some areas diversified • European counties often have Market & Command • France • “Middle Way” between Socialism & Capitalism from late 1940’s-1980’s • Privatization returned in banking and insurance • Governments shares ownership of some industries • Energy, Defense, Automobiles, etc.

  26. …Continued • Sweden • More government control • “Cradle to Grave” economy • Child Care 1-5 years old • Schooling 5-16 • Paid College • Health care, dental, paid time off to raise family • Old age provisions • Some of the highest taxes in the World are paid here • Often 60% of annual income to the state

  27. Trends In Modern Economies • Changes in Ownership • Economies go through predictable trends • Post WWII • British Nationalize industries • Change from private to public ownership • Economies are changing from Command to Market States • Industry beginning to become privatized • Change from public to private ownership

  28. Increasing Global Ties • Foreign investments help in privatization • Global economy • Economic ties across international borders • Foreign trade & markets opening • Opening of World Markets • Trade agreements • Faster, safer, & cheaper transport • More efficient methods of communication

  29. …Continued • Cross-border partnerships • Ford (US) & Mazda (Japan) partner • Share designs, distribution systems, plants, etc. • Engine production by China’s Changu Automotive Group • Improvements to technology through partnerships

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