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Economic Systems

This article discusses the three major production questions in economic systems: what to produce, how to produce, and for whom to produce. It provides an overview of traditional, command, market, and mixed economies, including their advantages and disadvantages. The article also explores communism, capitalism, and the characteristics of free enterprise capitalism.

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Economic Systems

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  1. Economic Systems

  2. The 3 Major Production Questions • What to produce? • How to produce? • For whom to produce? We will classify economic systems into categories, based on how each of them attempts to answer these three questions.

  3. Traditional Economy • The answers to the three major production questions are dictated by: • Ritual • Habit • Custom

  4. INUIT

  5. Traditional Economy • What to produce • Tradition answers this question • How to produce • Custom, hunt the same way in same place • Who gets what is produced • Custom, divide based on role in the hunt • Split depending on size of family • Who owns the resources • Members of tribe

  6. Examples of Traditional Economies • Inuit tribe • Some parts of South America • Some parts of Africa • Aboriginal tribes of Australia • Some island societies

  7. Traditional Economies Disadvantages? Advantages?

  8. Command Economy • The answers to the three major production questions are given by some strong central authority (e.g. the government) • Communism – an economic system in which all factors of production are the property of the state.

  9. Examples of Command Economies • Cuba

  10. Examples of Command Economies • North Korea

  11. Command Economies • Government controls important parts of economy • Transportation, communication, banking, and manufacturing • Businesses are owned/controlled by gov’t • Gov’t sets wages, decides who works what job

  12. Decision Making • Central planning group • Determines what to produce, how to produce it, and how much • Must ensure there are enough workers and resources to produce • Consumers have little to no choice

  13. Command Economies Weaknesses Strengths

  14. Market Economy • Businesses and individuals act in their own best interest to answer the three major production questions. • Capitalism – an economic system in which individuals and businesses compete, with a minimum of government interference • “Laissez-Faire”

  15. Market Economy • All economic decisions made through “bargaining system” • Any store • No one person or group runs a market economy—everyone plays a role • Produces competition in every aspect

  16. Profit Seeking • Profit is the difference between the total cost of production and the total revenues received from buyers • Determines how much to produce • Invest • Use your money to help a business get started or grow • Help business to earn a profit

  17. Market Economies Weaknesses Strengths

  18. Mixed Economies • Mixed-Market • Socialism • Economies in Transition

  19. Total Economic Freedom Little Economic Freedom Capitalism Communism Socialism Mixed-Market Total Government Control No Government Control

  20. 2013 Index of Economic Freedom: The Top 10 http://www.heritage.org/Index/

  21. Bottom 5

  22. Role Players in the Mixed-Market Economy • Consumers • Producers • Government • Consumer • Producer • Protector • Regulator • Provider

  23. 7 Economic & Social Goals of Capitalism • Economic Freedom – Choice • Economic Equality - • Economic Security – Stability • Economic Growth – More competition • Economic Efficiency – Less waste • Price Stability -inflation and deflation • Full Employment – Leads to more consumption

  24. Communism Communism: How/Why does it rise? How/Why does it fall?

  25. Capitalism Communism vs.

  26. Capitalism Communism vs.

  27. “From each according to his ability, to each according to his needs!” • Karl Marx • Critique of the Gotha Programme, 1875

  28. “As for me, I am not a Marxist.” Karl Marx

  29. Why Doesn’t It Work? • Incentive Problem • Average Test Scores Example • Coordination Problem • In one word, why doesn’t it work? GREED

  30. When CAN It Work?

  31. Economic Freedom Economic Equality Cooperation / Collectivization Competition Supply & Demand Government Planning Public Property Private Property Patriotism: The Good of Community Profit Motive

  32. Characteristics of Free Enterprise Capitalism • Economic Freedom • Voluntary Exchange • Consumer Sovereignty: The consumer drives the market • “The customer is always right!” • Private Property Rights • The Tragedy of the Commons • Profit Motive

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