Economic Systems

Three Key Economic Questions What goods and services should be produced? What goods and services should be produced? How should goods and services be produced? How should goods and services be produced? Who consumes these goods and services? Who consumes these goods and services?

Economic Goals and Societal Values

Economic efficiency Making the most of resources Economic freedom Freedom of government intervention in the production and distribution of goods Economic security and predictability Assurance that goods and services will be available, payments will be made on time, and a safety net will protect individuals in times of economic disaster Economic equity Fair distribution Economic growth and innovation Innovation leads to economic growth and economic growth leads to a higher standard of living Other goals Societies pursue additional goals, such as environmental protection

Traditional Economy Relies on customs to answer the three basic question. Relies on customs to answer the three basic question. Little room for change or innovation. Little room for change or innovation. Lack technology and new ideas Lack technology and new ideas

Market Economy Production and consumption are based on voluntary exchange in markets Production and consumption are based on voluntary exchange in markets The market answers the basic economic questions The market answers the basic economic questions

Command Economies In a centrally planned economy, the central government makes the basic economic questions In a centrally planned economy, the central government makes the basic economic questions

Mixed Economies Most economies are a mix of traditional, market and command economy. Most economies are a mix of traditional, market and command economy.

Objectives What are the three basic economic questions What are the three basic economic questions How are the three basic economic questions answered in a traditional, market, and command economy How are the three basic economic questions answered in a traditional, market, and command economy

Free Markets Markets exist because people can not be self- sufficient Markets exist because people can not be self- sufficient Instead people focus on specialization Instead people focus on specialization Since we specialize on few tasks, then we need market to buy and sell things Since we specialize on few tasks, then we need market to buy and sell things

Characteristics of a Market Economy Private Property- people use resources more wisely when they own the property. (90% of all goods and services in U.S. come from private sector) Profit Motive- profits are the incentive for producers to respond to consumer choices. Competition- keeps prices low and leads to innovation Self-interest (entrepreneurship)- risk taking, training and good management practices lead people to Consumer sovereignty- consumers determine the allocation of resources by making choices about how to spend their money. Limited government – prevent illegal activities and promotes fair business practices. Voluntary Exchanges- people concentrate on what they do best and trade for what they need

Circular Flow Chart of Market Economy

Adam Smith Wealth of Nation in 1776 Wealth of Nation in 1776 Competition and self interest keep the market place function Competition and self interest keep the market place function

Self-Regulating Nature of the Marketplace Self-Interest-people consider their self interest when making transaction Self-Interest-people consider their self interest when making transaction Competition makes sure people will not take advantage of each other. Competition makes sure people will not take advantage of each other. Self-Interest and Competition work together as an invisible hand to balance the economy Self-Interest and Competition work together as an invisible hand to balance the economy

The Invisible Hand "Invisible Hand of Market Forces" Suspected in Beating of Calgary Man The Invisible Hand of Market Forces is wanted in connection with the beating of Calgary resident Garth Yeoman on Saturday evening. Yeoman, a 30-year-old book burner, was walking back to his car after having dinner with friends at a downtown restaurant when the Invisible Hand allegedly launched its unprovoked, and unseen, attack. "Invisible Hand of Market Forces" Suspected in Beating of Calgary Man The Invisible Hand of Market Forces is wanted in connection with the beating of Calgary resident Garth Yeoman on Saturday evening. Yeoman, a 30-year-old book burner, was walking back to his car after having dinner with friends at a downtown restaurant when the Invisible Hand allegedly launched its unprovoked, and unseen, attack.

Advantages of the Free Market Efficiency- producer only make things that consumers want Efficiency- producer only make things that consumers want Freedom- work where you want, produce what you want, consume what you want Freedom- work where you want, produce what you want, consume what you want Growth- entrepreneurs are always seeking profitable situations Growth- entrepreneurs are always seeking profitable situations Additional Goals- offer a wide variety of goods and services, consumers decide what is produced Additional Goals- offer a wide variety of goods and services, consumers decide what is produced

Disadvantages of a Market Economy Disadvantages 1. Inequality- rich get richer 2. Destruction of the environment (pollution) 3. Formations of monopolies and oligopolies

Objectives Know how a circular flow chart works Explain why market exist Understand the self regulating nature of the markets Identify the advantages of a Market Economy

Centrally Planned Economies The basic economic questions are answered by the central government The basic economic questions are answered by the central government The government owns all the factors of production (land, labor, and capital) The government owns all the factors of production (land, labor, and capital) The government decides what to produce and how to produce it The government decides what to produce and how to produce it

Socialism is a social and political philosophy based on the belief that democratic means should be used to distribute wealth evenly through a society. Socialism is a social and political philosophy based on the belief that democratic means should be used to distribute wealth evenly through a society. Political and Economic equality Political and Economic equality

Communism Communism rose from Socialism Communism rose from Socialism Calls for violent revolution to destroy market economies Calls for violent revolution to destroy market economies Communism is socialism, but with an authoritarian central government Communism is socialism, but with an authoritarian central government

The Former Soviet Union

The Soviet Union was created in 1917 by a group called Bolsheviks that were socialists led by Vladimir Lenin. The Soviet Union was created in 1917 by a group called Bolsheviks that were socialists led by Vladimir Lenin. Lenin death led to the leadership of Joseph Stalin that turned the Soviet Union into a Communist country with him as the supreme leader. Lenin death led to the leadership of Joseph Stalin that turned the Soviet Union into a Communist country with him as the supreme leader.

Soviet Agriculture Created collectives or small groups of peasant farmers. Created collectives or small groups of peasant farmers. Central government told them what to grow and how to grow it. Central government told them what to grow and how to grow it. In the 1960’s the Soviet Union collectives were ordered to grow corn, but it was not suited for the climate. As a a result millions of people died. In the 1960’s the Soviet Union collectives were ordered to grow corn, but it was not suited for the climate. As a a result millions of people died.

Soviet Industry Soviet Factories were state owned Soviet Factories were state owned The government decided what to produce The government decided what to produce They choose heavy industry, defense industry, and the space program They choose heavy industry, defense industry, and the space program Consumer Industry were not a priority Consumer Industry were not a priority Consumer did not have a lot quality or variety when choosing products Consumer did not have a lot quality or variety when choosing products

Command Economies Advantages 1. More equality 2. Planned economy (rationing scarcities) 3. More security and social services Disadvantages 1. Lack of personal freedoms 2. Lack of consumer goods 3. Less incentive to work 4. Lack of coordination in the production of goods

Objectives How does a Centrally Planned Government answer the basic economic questions How does a Centrally Planned Government answer the basic economic questions What are some advantages and disadvantages to a command economy What are some advantages and disadvantages to a command economy What are some reasons that the Soviet Union failed What are some reasons that the Soviet Union failed

Economic Spectrum Hong KongFranceRussia USASwedenChinaN. Korea USASwedenChinaN. Korea_____________Canada___________________________Cuba____________ Free EnterpriseCentrally Planned Free EnterpriseCentrally Planned Socialism the government controls a small but vital parts of the economy usually around 15%. The industries under government control usually are energy, education, transportation and health care. In the U.S. we have public schools, parks, libraries, welfare, social security in which the government controls.

Reason for Modern Economies * Laissez-Faire policies have limitations. At some point government must intervene examples Northwest, Best Buy, Welfare, Social Security, Public Schools *Governments are asked to balance control and Freedom

A Circular Flow Chart of a Mixed Economy Add to market circular flow chart Add to market circular flow chart government with expenditures government with expenditures Taxes and Government Purchases Taxes and Government Purchases Government owned Factors and taxes Government owned Factors and taxes See Chart on pg 42 See Chart on pg 42

Circular Flow Chart of Market Economy

Objectives Why were Modern Economies created Why were Modern Economies created How does a Flow Chart of a Mixed Economy Work How does a Flow Chart of a Mixed Economy Work

Objectives What are the three basic economic questions What are the three basic economic questions How are the three basic economic questions answered in a traditional, market, and command economy How are the three basic economic questions answered in a traditional, market, and command economy

Objectives Know how a circular flow chart works Explain why market exist Understand the self regulating nature of the markets Identify the advantages of a Market Economy

Objectives How does a Centrally Planned Government answer the basic economic questions How does a Centrally Planned Government answer the basic economic questions What are some advantages and disadvantages to a command economy What are some advantages and disadvantages to a command economy What are some reasons that the Soviet Union failed What are some reasons that the Soviet Union failed