“Introduction to Economic Systems” Critical Questions

1. “Introduction to Economic Systems”Critical Questions • What key economic questions must every society answer? • What basic economic goals do societies have? • What types of economic systems exist today?

2. What is an economic system? The method used by a society to produce and distribute goods and services

3. The Three Questions that Determine a Societies Economic System Because ALL economic resources are scarce, every society must answer three questions: • What goods and services should be produced? • Guns or butter? • How should these goods and services be produced? • What combination of factor resources should we use? • Who consumes these goods and services? • How will income be distributed?

4. Four Economic Systems • An economic system is the method used by a society to produce and distribute goods and services. Traditional economiesrely on habit, custom, or ritual to decide what to produce, how to produce it, and to whom to distribute it. In a command economy the central government makes all decisions about the production and consumption of goods and services. In a market economyeconomic decisions are made by individuals and are based on exchange, or trade. Mixed economiesare systems that combine tradition and the free market with limited government intervention.

5. Traditional System • A traditional system relies on habit, custom or ritual to decide what to produce, how to produce it and to who to distribute it. • Agricultural and hunting societies

6. There is little room for innovation or change. • They tend to lack modern conveniences and have a low standard of living. • Close knit communities with focus on the family unit.

7. Traditional Economies are now limited to isolated tribes and sects found in more remote areas of the world.

8. "In 1492, Columbus sailed the ocean blue" . . . and made the first contact with the "Indians." For Native Americans, the world after 1492 would never be the same. This date marked the beginning of the long road of persecution and genocide of Native Americans, our indigenous people. Genocide was an important cause of the decline for many tribes."By conservative estimates, the population of the United states prior to European contact was greater than 12 million. Four centuries later, the count was reduced by 95% to 237 thousand.

10. Why Do Markets Exist? Markets exist because none of us produces all the goods and services we require to satisfy our needs and wants. A market is an arrangement that allows buyers and sellers to exchange goods and services. Specialization is the concentration of the productive efforts of individuals and firms on a limited number of activities.

11. Circular Flow Diagram of a Market Economy monetary flow physical flow Households Firms physical flow monetary flow Free Markets • In a free market economy, households and business firms use markets to exchange money and products. • Households own the factors of production and consume goods and services.

12. Adam Smith (1723-90) • Scottish social philosopher and professor that wrote one of the most influential books on market economics. • His book, “An Inquiry into the Nature and Causes of the Wealth of Nations”, was published in 1776. The book took 10 years to write and consisted of 5 volumes. • The book describes the way in which markets function without government intervention. A “laissez faire” approach.

13. Adam Smith and the Invisible Hand • In every transaction, the buyer and seller consider only their self-interest, or their own personal gain. Self-interest is the motivating force in the free market. • Producers in a free market struggle for the dollars of consumers. This is known as competition, and is the regulating force of the free market. • The interaction of buyers and sellers, motivated by self-interest and regulated by competition, all happens without a central plan. This phenomenon is called “the invisible hand of the marketplace.”

14. Advantages of the Free Market • Economic Efficiency • As a self-regulating system, a free market economy is efficient. • Economic Growth • Because competition encourages innovation, free markets encourage growth. • Economic Freedom • Free market economies have the highest degree of economic freedom of any economic system. • Additional Goals • Free markets offer a wider variety of goods and services than any other economic system.

15. Command Economies The government,or central authority controls the economy.

16. Organization of Centrally Planned Economies In a centrally planned economy, the government owns both land and capital. The government decides what to produce, how much to produce, and how much to charge. Communism is a political system characterized by a centrally planned economy with all economic and political power resting in the hands of the government. Communist governments are authoritarian in nature. Socialismis a social and political philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout a society.

17. German philosopher • Developed radical approach to understanding and coping with the problems that occurred in free market systems • Published the Communist Manifesto in 1848 with close friend Frederick Engels. • In his pamphlet he argued that history is a series of class struggles between the rich capitalists and the working class “proletariat”. • He believed that eventually workers needed to unite and revolt against the capitalists. This revolution would then breed a classless society. KARL MARX(1818-1883)

18. Frederick Engels Karl Marx

21. Philosophy Becomes Reality • In 1917, the ideas proposed by Marx would become a reality. • The Bolshevik Revolution, led by communist Vladimir Lenin, would result in a centrally planned society.

22. The Creation of the Soviet Union

23. The Soviet Experiment • Land, labor and capital was all controlled by the state. The best resources were allocated to to the armed forces, space program, and production of capital goods. • Government committees decided the quantity, process and distribution of all products. • The government created large state-owned farms and collectives to produce all agricultural products. • Under this system there was little incentive to produce, and the Soviet Union saw a rapid decline in the production of agricultural goods. STALIN

24. The Meaning Behind the Flag The hammer and sickle originate from the unique Russian unity of the peasants (the sickle) with the workers (the hammer) who together formed the Soviet Russian state. • The Red field is symbolism of the blood that has been spilt by workers the world over in the fight for their emancipation. • The single yellow star is the representation of the life and immense energy of the sun, empty because within is the blood or production of workers struggle.

25. Centrally planned economies face problems of poor-quality goods, shortages, and diminishing production.

26. Other Problems in Centrally Planned Economies • Performance falls short of the set ideals • Fail to meet consumer needs and wants • Little individual incentives to work hard • Lack of innovation • Expensive and inflexible government structure needed to manage the system • Sacrifice of individual freedoms to pursue societal goals

27. Mixed Economies • It is doubtable that any nation can exist successfully under a pure centrally planned economy or a pure market economy. • Most economies mix features of both systems.

28. An economic system that permits the conduct of business with minimal government intervention is called free enterprise. The degree of government involvement in the economy varies among nations. Nations are placed on a continuum (a range with no clear divisions) of mixed economies. On one end are centrally planned economies and on the opposite end are free markets economies. Continuum of Mixed Economies Centrally planned Free market Iran South Africa France United Kingdom Hong Kong North Korea China Botswana Canada Singapore Cuba Russia Greece Peru United States Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick Comparing Mixed Economies