Introduction to Economic Systems

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

24. 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

25. 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

26. 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

27. …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

28. …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

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

30. 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

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

32. …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

33. Modern Economies in a Global Age

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

35. 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

36. …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

37. 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.

38. …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

39. 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

40. 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

41. …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