Economic Systems

1. Economic Systems The Rules and Incentives in an Economy

2. Traditional Economy • Families, clans, or tribes take care of production and distribution by following the customs that have been handed down from one generation to the next

3. Command Economy • Also known as Communism, Socialism, Marxism, and Centrally Planned. • Government officials decide what goods and services will be produced, how they will be produced, and how they will be distributed • The government owns and controls all means of production. (N. Korea, Cuba)

4. Market Economy • Also known as Capitalism • Based on individual choice and voluntary exchange. Consumers are free to spend their money as they would like. • These consumers are also producers and are free to enter into a business or sell their labor to whomever they would like.

5. Mixed Economies • Most economic systems are actually a combination of a centrally planned economy and a market economy, some to a lesser degree (the U.S.) and some more so (Venezuela) and many along the spectrum in between.

6. Economic Systems • What is the economic problem?

7. Economic Systems Scarcity!

8. Soviet companies were not guided by prices or profit. Gov’t officials determined output quotas based on quantitative measurements. Businesses were paid based on meeting these quotas. • Why did a business make desk lamps that were filled with lead that were almost too heavy to carry? • Why did light bulb producers only make tiny night light size bulbs? • Why did oil companies drill many shallow holes when they knew that oil deposits are usually found in deep holes that require slower drilling? • Why did a construction superintendent order his workers to remove bathtubs from the first floor and install them in the third floor while he slowly lead inspectors through apartment building. • Why did black market vendors sell burned out light bulbs?

9. Advantages and Disadvantages • What is GOOD about Communism? • Low unemployment-everyone has a job • Great Job Security-the government doesn’t go out of business • Equal incomes means no extremely poor people • Free Health Care

10. What is BAD about Communism? • No incentive to work harder • No incentive to innovate or come up with good ideas • No Competition keeps quality of goods poor. • Corrupt leaders • Few individual freedoms

11. Economic Systems • Look at the Economic Freedom of the World map on the wall. • What do the countries in red and orange have in common?

12. Economic Systems • Why are things less scarce in S. Korea than N. Korea?

13. Economic Systems • How can we best solve the economic problem?

14. North and South Korea

15. N & S Korea at Night

16. The Three Economic Questions • People in all economies (traditional, capitalist, command and mixed) must decide how to answer the three basic economic questions. • What will be produced? • How will it be produced? • For whom will it be produced?

17. Factors of Production • Factors of Production • Land • Labor • Capital (tools, machinery, etc.) • Entrepreneurship

18. N & S Korea at Night

19. Economic Systems • Review • Know the three economic systems mentioned in class and their respective characteristics • Know the broad social goals of economic systems and which system they most closely align • What are the three key economic questions?

20. Economic Systems • Explain: • The invisible hand (Smith) • Incentives and private property • Command economy and incentives • List and explain the 4 factors of production