Economic Systems

1. Economic Systems

2. Vocabulary - Page 26-27 Standard of living Traditional economy Market economy Command/Planned economy Mixed economy

3. History of Economics Adam Smith - Father of economics Wrote “Wealth of Nations” in 1776 – Revolutions Free Markets Self-interest Invisible Hand “laissez faire” To let be

4. From the Wealth of Nations “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest” What does this mean?

5. History of Economics Karl Marx Wrote “The Communist Manifesto” Believed that capitalism exploits the working class Rich get richer “Proletariat Revolution”

6. Economic Systems • An economic system describes how a country’s economy is organized • Because of the problem of scarcity, every country needs a system to determine how to use its productive resources • Scarcity = not having enough of something • An economic system must answer 3 questions…

7. Economic Systems • WHAT TO PRODUCE? (What kinds of goods and services should be produced?) • HOW TO PRODUCE? (What productive resources are used to produce goods and services?) • FOR WHOM TO PRODUCE? (Who gets to have the goods and services?

8. Three Types of Economic Systems: • 1. Traditional Economy • 2. Command Economy • 3. Market Economy • 4. * Most countries are… Mixed Economies! (Market + Command)

9. Traditional Economy • An economic system in which economic decisions are based on customs and beliefs • People will make what they always made & will do the same work their parents did • Exchange of goods is done through Bartering: trading without using money

10. Traditional Economy • Who decides what to produce? • People follow their customs and make what their ancestors made • Who decides how to produce goods & services? • People grow & make things the same way that their ancestors did • Who are the goods & services produced for? • People in the village who need them

11. Traditional Economy • Examples: • Villages in Africa and South America • the Inuit tribes in Canada • the caste system in parts of rural India • the Aborigines in Australia

12. Command System Government makes all economic decisions & owns most of the property Governmental planning groups determine such things as the prices of goods/services & the wages of workers This system has not been very successful & more and more countries are abandoning it

13. Command Economy • Who decides what to produce? • Government makes all economic decisions • Who decides how to produce goods and services? • Government decides how to make goods/services • Who are the goods and services produced for? • Whoever the government decides to give them to

14. Command System Countries with communist governments have Command economies Examples: There are no truly pure command economic systems, but close countries are: North Korea, former Soviet Union, Cuba *Germany and Russia have moved away from having a Command economy since 1991. Now they have a Mixed economy.

15. Market Economy • An economic system in which production and distribution questions are answered by prices and profits (supply and demand) • Most of the resources are owned by private citizens • Economic decisions are based on Free Enterprise(competition between companies) • Important economic questions are not answered by gov. but by individuals • Gov. does not tell a business what goods to produce or what price to charge

16. Market Economy • Who decides what to produce? • Businesses base decisions on supply and demand and free enterprise (PRICE) • Who decides how to produce goods and services? • Businesses decide how to produce goods • Who are the goods and services produced for? • consumers

17. Market Economy There are no truly pure Market economies, but the United States is close.

18. In a truly free market economy, the government would not be involved at all • There would be no laws to protect workers form unfair bosses • There would be no rules to make sure that credit cards were properly protected • Many societies have chosen to have some rules to protect consumers, workers, and businesses (MIXED) • These rules reduce the freedoms that businesses have, but they also protect the workers and consumers

19. Mixed Economy • Market + Command = Mixed • There are no pure command or market economies. • To some degree, all modern economies exhibit characteristics of both systems and are often referred to as mixed economies. • Most economies are closer to one type of economic system than another • Businesses own most resources and determine what and how to produce, but the government regulates certain industries

20. Mixed Economy • Who decides what to produce? • businesses • Who decides how to produce goods and services? • Businesses, but the government regulates certain industries • Who are the goods and services produced for? • consumers

21. Mixed Economies • Most democratic countries fall in this category (there are no truly pure Market or Command economies). • Examples: Brazil, Mexico, Canada, UK, US, Germany, Russia, Australia, etc.

22. Economic Systems How the Government influences how I make money.

23. Which Economic System Is Best? • Market system has proven to be best because it promotes the goals of growth, freedom, & efficiency • Citizens are free to own their own property and use it in the most efficient and profitable way • Command and Traditional systems sometimes offer more security, but are not nearly as strong in efficiency, growth, freedom, and environmental quality

24. Review What book did Adam Smith write about economics? What is an economic system? What economic system did Adam Smith write about and what were the attributes? What are the three types of economic systems? Is any economic system pure?

25. Define – Page 28 Market Specialization Household Firm Profit Factor Market Product Market Incentive Competition

26. Free Enterprise • The economic system used in U.S.(Free Market) • Guided by self-interest and competition • Adam Smith – “Wealth of Nations” • Invisible Hand • Role of government in markets is limited

27. Markets Markets exist because no-one is self-sufficient Specialization leads to efficient use of resources Because of specialization we need markets to sell and buy

28. Characteristics of Free Enterprise • Voluntary Exchange • the voluntary act of buyers and sellers freely and willingly engaging in market transactions • buyers spend their money on a product or service • they believe that the item they purchase is of greater value than the money they give up—or they would not make the purchase.

29. Economic Freedom • freedom to choose your occupation, your employer, and your job location. • Businesses also enjoy considerable economic freedom free to hire the workers of their choice, and they are free to produce the products they think will be the most profitable.

30. Private Property • allow people to own and control their possessions as they wish. • gives people the incentive to work, save, and invest. • Fourteenth Amendment protects private property rights • makes borrowing possible and investing attractive

31. Profit Motive • people are free to risk any part of their wealth in a business venture. • If it goes well, they will earn rewards for their efforts = Profit • Profit Motive allows for the business to always want to improve.

32. Competition • the struggle among sellers to attract consumers with the best products at the lowest prices. • Forces businesses to choose what products are the best

33. Benefits of Free Enterprise Individual Freedom Variety of Goods Adapting to Change Promotes Progress Creation of Wealth

34. Drawbacks to Free Enterprise • Uneven Economic Growth • not always smooth and uninterrupted. • Periods of uneven economic growth are not pleasant, but they do remove some of the “fat” or unneeded activities in businesses and public services

35. Growing Gaps Between Rich and Poor(Equity) • rich seem to get richer while the poor seem to stay poor. • Some of this is due to the fact that some people—if they are able to devise a product that meets the consumer’s economic need—can grow very rich in a very short period of time.

37. Circular Flow Model Individuals and privately owned businesses control the factors of production Circular flow model shows how individuals and businesses exchange money, resources and products in the marketplace

38. Circular Flow Model • Households and firms are represented • Factor Market • Firms purchase factors of production from households • Product Market • Goods and services produced by firms are purchased by households