Economic Systems

1. Economic Systems Business Economics

2. Objectives • Three Economic Questions • The Economic Systems • Examples of Countries • Research Project

3. Three Economic Questions • All economies must answer these three questions: • What goods and services will be produced? • How will they be produced? • For whom will they be produced?

4. Economic System • An economic system is the method used by a society to produce and distribute goods and services. • Some questions to ask: • Who owns the resources? • What decision-making process is used to allocate resources and products? • What types of incentives guide economic decision makers?

5. Traditional Economic System • Economic system is based on customs and traditions (handed down from 1 generation to another). • Allocation of scarce resources stems from ritual, habit, or customs • BARTER!! Means trade! No money! • Examples: Africa, parts of India, the Australian Aborigines

6. Examples of Traditional Economies Aborigines Inuits

7. Advantages Disadvantages • Economic roles are set • Stable, predictable, and continuous • Discourages new ideas • Lack of progress • Lower standard of living

8. Does a traditional economy answer the big three questions? • What will be produced? • Whatever tradition, values, and rituals dictate • How will it be produced? • However tradition, values, and rituals dictate • For whom will it be produced? • Whomever tradition, values and rituals dictate

9. Command Economy • A central authority (government) has to answer the big three questions • Government decides the needs of the people, the best way to produce it and for everyone!

10. Command Economy • There is very little if any input from the people. • Examples: North Korea, Cuba, China

11. Advantages Disadvantages • Basic Needs taken care of • Education, public health, other services cost very little if anything • Very little unemployment • Doesn’t meet wants • No incentives • Requires a large bureaucracy • New and different ideas are discouraged • No room for individuality

12. Does a command economy answer the big three questions? • What is being produced? • Whatever the government decides • How is it being produced? • The government will tell someone to make it • For whom is it being produced? • Whomever the government decides needs it

13. Capitalism/Market • System that relies on consumption choices made by consumers • Consumers dictate what is produced, how much is produced, and how much things cost

14. Capitalism/Market • Examples: Canada, South Korea, Singapore, Germany, Great Britain, and the UNITED STATES!

15. Advantages Disadvantages • Individual Freedom for all • Lack of government interference • Incredible variety to choose from • High degree of consumer satisfaction • Rewards only productive people • Workers and businesses face uncertainty (Competition) • Not enough public goods (Education, health, defense) • Unemployment • Must guard against market failure

16. Answer the big three… • What will be produced? • Whatever the consumer wants • How will it be produced? • Entrepreneurs will respond to demand • For whom will it be produced? • Whomever is willing to work for it (or afford it)

17. Mixed Economy • A mix of all of the other three economies • Some government involvement, consumer driven, aspects of economy based on traditional values • This is really what the US is…. • Examples: Obama Care, Bail outs yet consumer driven. Family owned stores and corporations.

18. Characteristics • Food & housing subsidies (aids) keep prices low so everyone has a place to live and food to eat • Medical care is free • Little or no economic freedom • No financial incentive for people to increase productivity • Want to be entrepreneurs cannot start their own business

19. Strong Command Economy • The gov’t owns and controls • Factories, equipment, land • Leaders answer the 3 basic questions • Political structure • Communism

20. Command Economy • Influenced by commands, directives or central authority • One person, small group who control society • Members of society carry out demands Kim Jong II Fidel Castro

21. Economies in Transition • Prior to the Soviet Union breakup, Poland owned approx 80% of the country’s productive assets • After the breakup, it owned only 55% • Poland welcomed private investors that wanted to buy its state-run factories, which were inefficient & non productive

22. Privatization vs. Nationalization • Privatization – the processes of gov’t selling gov’t-owned businesses to private individuals/businesses • Generates much needed revenue • Demonstrates a high level of commitment to making the transition to a market system • Can help balance budgets

23. Privatization vs. Nationalization • Nationalization – the gov’t takes over private-held companies • Transfer of ownership may be due to an economic crisis, a political upheaval, or a change in gov’t policy

24. Developing Economies • Mostly poor countries with little industrialization • Trying to become more prosperous & develop infrastructure • Success depends on the education of the labor force • Chad, an African Country, is a developing country • Traditional economy based on agriculture & livestock farming • Cotton, cattle, & gum arabic are its primary exports • An oilfield & pipeline project paid by foreign investors has helped Chad develop its oil reserves for export • This will help Chad with much needed funds for this poor nation

25. Traditional Economy • Shaped largely by custom or religion • Family relations play significant roles in economic activity • Same methods of production are used • Roles are narrowly defined

26. Traditional Economy Advantage • Everyone has a role in it Disadvantage • Discourage new ideas and way of doing things • Rain forests of Latin America • Parts of Africa • Middle East

27. Socialism • Originally referred to a system on its way to the communist ideal of a classless society • Today, most countries that are defined as this, have democratic political institutions • They differ from capitalist nations because of the increased amount of gov’t involvement • Main goal is to meet basic needs for all & to provide employment for many

28. Characteristics • Tend to have more social services to ensure a certain standard of living for everyone • Medical care & education are free or inexpensive • Systems for pensions and elderly care • Businesses & individuals pay much higher taxes than those in capitalist countries • Taxes contribute to financing the gov’t

29. Examples of Socialist Countries • The gov’t runs key industries & makes economic decisions • State-controlled, noncompetitive companies are often found in industries such as: • telecommunications, natural resources (such as gas, water, & power), transportation, & banking • Canada, Germany, & Sweden are generally characterized have having socialist elements in their economies

30. Moderate Command Economy • Political structure = Socialism • Gov’t owns major industries • Railroads, steel & iron industry • Limited opportunities for private ownership Sweden France

31. Problems with Centrally Planned Economies • Consumers get low priority • Little to No freedom of choice • No reward for innovation • How much should be produced? • Typically results in surpluses and shortages

32. Invisible Hand of Markets • According to economist Adam Smith (1723–1790), market forces coordinate production as if by an “invisible hand.”

33. Laissez Faire • 18th century economic theory • “Let it be economics” • Stands for “Leave Alone” • Strongly oppose government intervention in business affairs • Against minimum wage, duties (taxes on certain goods) & trade restrictions

34. Capitalism • Characterized by marketplace competition and private ownership of businesses • Same as free enterprise or private enterprise • An advantage is that successful employers & employees prosper

35. Characteristics • Government is concerned about its people and cares for those who cannot care for themselves • The gov’t also has some involvement in the free market • Policies and laws that affect the market • Must keep a balance between too much and too little regulation

36. Political Foundations of Capitalism • The political system most frequently associated is democracy • These nations believe that political power should be in the hands of the people • Usually more than one political party from which to choose representatives to run the gov’t • People are free to elect those candidates who agree with their philosophy on how the gov’t & economy should be run

37. Political Foundations of Capitalism • The US and Japan are 2 examples of countries that are classified as capitalist and have a democratic form of government

38. Market Economy • Regulation by government is minimal • Economic activity • based on the prices generated in free, competitive markets • Economic questions • Buyers & sellers • Referred to as Capitalism

39. Market Economy • Economic decisions are based on Buyers & Sellers • Produce goods & services that will provide profit Sellers & Producers

40. Plusses & Minuses of Market Economies • Difficulty enforcing property rights • Some people have few resources to sell • Some firms try to monopolize markets • “You need money to make money” • Freedom for everyone to be involved • Adjusts as consumer wants & needs change

41. Essential Question • Why do most countries have a mixed economy?

42. What Do You Like on a Sundae? • What toppings do you like on an ice cream sundae? • Plain Vanilla? • Or absolutely everything (and I mean everything)?

43. What Do You Like on a Sundae? • Chances are, you were somewhere between plain and everything. • When discussing economies, most countries are somewhere in between too. • When a country is not completely a command economy and not completely a market economy, but somewhere in between, it is called a Mixed Economy.

44. Mixed Economy – “In Between”

45. Most Countries Lie Somewhere in Between -However, they may be closer to one side than the other.

46. 7 Roles of Government in a mixed economy • Establishing and enforcing rules of exchange • Property rights • Contract law

47. 7 Roles of Government in a mixed economy • Promoting competition/prevent anticompetitive practices

48. 7 Roles of Government in a mixed economy • Regulating natural monopolies • One firm that can serve the entire market at a lower per- unit cost than can two or more firms

49. 7 Roles of Government in a mixed economy • Provide public goods Technical characteristics of public goods: • Non rival consumption • High cost of excluding those who do not pay

50. 7 Roles of Government in a mixed economy • Dealing with externalities • Externality is a cost or benefit that falls on third parties and is therefore ignored by the two parties to the market transaction • Negative externality – cost imposed on others • Positive externality – benefit gained by others Visibility Impairment from Air PollutionShenandoah National Park - Virginia