Economic Systems

Economic Systems

Comparative Economic Systems Do Now: Answer the following question to the best of your ability: What problem/issue determines how a country needs a system to determine how to use its productive resources?

Human wants are unlimited, but resources are not.

Economic System An economic system, is the way a nation makes economic choices about how the nation will use its resources to produce and distribute goods and services.

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 Given scarce resources, an Economic System must answer the three basic economic questions

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?

Standards Used to Distinguish Economic Systems Some standards used to distinguish among economic systems are: • Who owns the resources? • What decision-making process is used to allocate resources and products? • What types of incentives guide economic decision makers?

Three Economic Systems • Traditional Economy • Command Economy • Market Economy

Types of Economic Systems • Traditional System • Command (controlled) System • Market (capitalist) • Mixed System

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

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

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

Traditional Economic System- I give you bone for that plastic club! Me give you bone for Audi 500- me drive fast past you in mud!

Traditional System • Traditional economy – system in which economic decisions are based on customs and beliefs that have been handed down from generation to generation • Trades and work learned from parents • Know what is expected of you • Change discouraged or punished • Production inefficient and choice of goods is rare • Examples – Eskimos, Aborigines & Amish?

Traditional Economic System: Ritual, Habit, and Custom • The basic economic questions are answered: by doing things the way they have always been done.

Advantages Sets forth certain economic roles for all members of the community Stable, predictable, and continuous life Revolves around family Communities stay relatively close and small

Disadvantages Discourages new ideas, new technology, and new ways of doing things Stagnation and lack of progress Lower standard of living – lack modern conveniences Have few mechanisms in place to deal with disasters such as floods, drought

Traditional System • Traditional economy – system in which economic decisions are based on customs and beliefs that have been handed down from generation to generation • Trades and work learned from parents • Know what is expected of you • Change discouraged or punished • Production inefficient and choice of goods is rare • Examples – Eskimos, Aborigines & Amish?

Traditional Economy In a traditional economy, goods and services are produced by the family for their personal consumption. A traditional economy is shaped largely by custom or religion.

Traditional Economy In a traditional economy, resources are allocated according to long-lived practices from the past. There is little surplus (something extra) and little trade (or exchange of goods).

Traditional Economy In a traditional economy, there is only a limited need for markets (places to buy and sell goods and services).

Traditional Economy A traditional economy is the type of economy found in less developed nations, usually in rural areas.

Command Economy In a command economy, all resources are collectively owned and directed by the government. In a command economy, the government decides what and how much to produce.

In a command economy, the government answers the three basic economic questions: • 1. What? A dictator or a central planning committee decides what products are needed. • 2. How? Since the government owns all means of production in a command economy, it decides how goods and services will be produced. • 3. For whom? The government decides who will get what is produced in a command economy.

Command Economy In a command economy, the government decides where to locate economic activities.

Command Economy In a command economy, the government decides what prices to charge for goods, including agricultural goods and services.

Command Economy In a command economy, economic decisions are often made to further the goals of the government.

Command Economy In a command economy, production costs (how much it costs to make an item), are not reflected in the cost of the item. For example, in a command economy it might cost $2.00 to produce a loaf of bread, but the price might be set at $1.00 in order to ensure that customers are able to afford adequate food.

Command Economy In a command economy, the price might be set higher than the production costs. For example, in a command economy it might cost $5,000.00 to produce a car, but the price might be set at $10,000.00 in order to ensure that only the wealthy can buy it.

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

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

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.

Command System • Command economy – system in which the government controls the factors of production and makes all decisions about their use • Government decides what to produce & how it will be distributed • Government guides people into certain jobs • Lack of incentive to work hard, few choices, limited efficiency or inventiveness • North Korea & China (changing)

13-14. Command Economy Critics of market economies claimed that capitalism was a form of “class warfare.” They claimed that capitalism/ market economies resulted in a few people ruling over the masses. In order to end capitalism/ market economies critics claimed that a revolution was needed to redistribute goods equally. This revolution came to be known as communism and its economy was known as a command economy. In a command economy the government controls all aspects of the economy.

Command Economy- Typically begin with revolutions.

Karl Marx was the founder of the communist/ command economy ideology. He claimed that as long as there existed a business owning class oppression would continue.

Traits of a Command Economy • The government controls all aspects of the economy • Private property is illegal • Supply and demand are determined by the government, not by consumers and producers. • Everyone is paid equally no matter what job they do. • Industry and businesses are owned and controlled by the government, not private individuals.

15. Criticism of Command Economies • Command economies are inefficient and reward unproductive workers. Critics claim that since workers are awarded the same amount of money for doing every job workers aren’t productive. • Command economies result in shadow/ illegal markets. Because the government controls the distribution of goods, rather than consumers and producers individuals begin to sell things illegally. • Command economies cease to stay competitive in the world because competition and entrepreneurship is discouraged.

Examples of a Command Economy- In North Korea the former dictator Kim Il Sung controlled the economy with an iron hand and had statues of himself built to show his people who was in charge of the government and the economy.

Command or Centrally Planned Economic System Basic economic questions of what, how and for whom to produce are answered: by a central planning authority.

Advantages Central authority is in command of the economy Capable of dramatic change in a short time Little uncertainty over choice of career, where to work, or losing job Many basic education, public health, and other public services available at little or no cost

Disadvantages Does not meet wants and needs of consumers Lacks effective incentives to get people to work Requires large bureaucracy, which consumes resources New and different ideas discouraged, no room for individuality

Problems of a Centrally Planned Economy Centrally planned economies face problems of poor-quality goods, shortages, and diminishing production.

Market Economy (free enterprise, capitalism) Individual producers must figure out how to plan, organize, and coordinate the production of products and services. In a market economy, resources are allocated through individual decision making.

Market System • Market – freely chosen activity between buyers and sellers of goods and services • Circular flow of economic activity – economic model that pictures income as flowing continuously between businesses and consumers • Advantages – free to choose career and how to spend $, own private property, take risks, & many goods for purchase • Disadvantages – How to provide for elderly, young & sick

Market Economy(free enterprise, capitalism) • In a free-market country, people can own their own businesses and property. People can also buy services for private use, such as healthcare. (But most capitalist governments also provide their own education, health and welfare services. )

Market Economy(free enterprise, capitalism) • In a market economy, prices act as signals of scarcity. When the price of something is high, that means it's more scarce. Demand for it is high relative to the supply.

Market Economy(free enterprise, capitalism) • When the price of something is low, then it's less scarce. By observing prices, consumers and producers can choose their behavior to respond to scarcity.

Market Economy(free enterprise, capitalism) • High prices encourage producers to switch from more scarce to less scarce resources, and they encourage consumers to switch from products and services that require more scarce resources to products and services that require fewer scarce resources.

Characteristics of the American Economy • Freedom of choice – can choose to produce or not produce or to buy or not to buy • 6 Characteristics of a pure market system • 1. Little or no government control • 2. Freedom of enterprise • 3. Freedom of choice • 4. Private property • 5. Profit incentive • 6. Competition

Economic Systems