Economic Systems Today’s Objective: To be able to differentiate between the three economic systems and their characteristics. C-4 Assess information and draw conclusions

Types of Economic Systems Economic system: ▫How society uses resources to satisfy people’s wants Three basic systems: ▫Traditional ▫Command ▫Market economies Combined: Mixed economy

Economic Systems Read through the economic systems sheet With someone next to you, list 3 examples of elements of each type of economic system that we find in the US economy Then list the pros and cons of each system

Types of Economic Systems Traditional Economy ▫Centers on families, clans, or tribes ▫Decisions are based on customs and beliefs ▫Good of the group always comes before individual desires

Characteristics of Traditional Economies Advantages and Disadvantages ▫Advantages: little disagreement over goals, roles  methods of production, distribution determined by custom ▫Disadvantages: as result of resistance to change, less productive  do not use new methods; people not in jobs they are best suited for  low productivity results in low standard of living Example: Sami Reindeer Herders

Types of Economic Systems cont. Command Economy ▫(centrally planned economy) government makes economic decisions  determines what to produce; how to produce; who gets products  determines who is employed, work hours, pay scales ▫Wants of individual consumers rarely considered ▫Government owns means of production: resources and factories

Command Economies Today  No pure command economies today  Some economies still have mostly command elements

Command Economies Today North Korea ▫Communist North Korea used resources for military, not necessities  built large army; nuclear weapons program  In 1990s and early 2000s, millions died of hunger, malnutrition  In 1990s, production decreased and economy shrank  Since 2003, some market activity allowed

Command Economies Today Impact of Command Economies ▫In theory, command systems fair to everyone; In practice, many disadvantages  central planners do not understand local conditions  workers have little motivation to be productive or conserve resources  artificially low prices lead to shortages  people sacrificed to carry out centrally planned policies

Types of Economic Systems cont. Market Economy ▫driven by choices of consumers and producers  consumers spend money, go into business, sell their labor as they wish  producers decide how to use their resources to make the most money ▫Consumers, producers benefit each other when they act in self-interest

Fundamentals of a Market Economy 1: Private Property and Markets 2:Limited Government Involvement ▫ Laissez faire—government should not interfere in economy ▫ Capitalism—system having private ownership of factors of production  says producers will create products consumers demand ▫Actual market economies all have some government involvement

Fundamentals of a Market Economy 3: Voluntary Exchange in Markets ▫ Voluntary exchange—traders believe they get more than they give up 4: Competition and Consumer Sovereignty ▫Consumer sovereignty—buyers choose products, control what is produced ▫Competition controls self-interested behavior  sellers offer low price or high value to please consumers, make profit

Fundamentals of a Market Economy 5: Specialization and Markets ▫ Specialization—people concentrate their efforts in the activities they do best  encourages efficient use of resources  leads to higher-quality, lower-priced products

Impact of Market Economies Advantages ▫Individuals free to make economic choices, pursue own work interests ▫Less government control means political freedom ▫Locally made decisions mean better use of resources, productivity ▫Profit motive ensures resources used efficiently, rewards hard work  resulting competition leads to higher-quality, more diverse products

Impact of Market Economies Disadvantages ▫Pure market economy has no way to provide public goods and services ▫Does not give security to sick or aged ▫During U.S. industrial boom, business owners rich, workers low pay ▫Businesses did not address problems caused by industrialization ▫Industrialized societies adopt some government control of economy

Today’s Mixed Economies Types of Mixed Economies ▫U.S. basically has market system ▫European countries greater mix of market and command elements  France—government controls some industries; provides social services  Sweden—state owns part of all companies; lifelong benefits, high taxes  Namibia—traditional; state supports market, foreign investment

Traditional, Market, Command, or Mixed? Look through the examples on your chart and check off the appropriate box Be prepared to explain your answer

Dreaded Disease Read through the dreaded disease scenario With a partner answer the questions Keep in mind what we’ve discussed about economic systems and opportunity cost

Dreaded Disease What would be the “market” solution to the problem? ▫Benefits? ▫Opportunity cost? What would be the command solution to this problem? ▫Benefits? ▫Opportunity cost?

Campus Parking Options Leave things as they have been First-come, first-served Markets and a price system Democracy Random choice