Types of Economic Systems

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Presentation transcript:

Types of Economic Systems

Recall… Definition of Economics The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of human materials wants. Human wants are unlimited, but the means to satisfy the wants are limited.

The Economic Perspective Scarcity and choice Resources can only be used for one purpose at a time. Scarcity requires that choices be made. The cost of any good, service, or activity is the value of what must be given up to obtain it. (opportunity cost). Rational Behavior Rational self-interest entails making decisions to achieve maximum fulfillment of goals. OR “people pursuing projects of their own choosing! Mother Theresa Adam Smith: The individual “intends only his gain,” but is directed by the “invisible hand” of market prices to promote the goals of others, leading to greater prosperity The rancher isn’t concerned about me eating steaks. His only concern is making money by selling his cattle to the slaughter house who sells to the processing plant who sells to the grocery store who sells to you. All those entities are looking out solely for themselves—not anyone else! That is why we get the things we need at the best price possible. THE MARKET WORKS!!!

Types of Economic Systems Economic Systems are defined by who answers the three basic economic questions  Traditional Economy custom and tradition guides production e.g., native tribes, African tribes, etc.  Command Economy gov’t controls production e.g., Old Kingdom Egypt, Medieval Europefeudalism)  Market Economy individuals (and the market) control production (laissez-faire, self-interest, incentives, etc.)

Types of Economic Systems Mixed Economy Combines parts of traditional, command and market economies to answer three questions of production (what, how, and for whom to produce) Authoritarian Socialism/Communism Government owns or controls nearly all the factors of production. Most like a command economy. E.g., Cuba, China Capitalism Individuals own factors of production. Most like a pure market economy. Limited role of government—it only taxes, spends, and regulates. E.g., U.S., Japan, Canada, Mexico, Taiwan, Singapore, Hong Kong Democratic Socialism Government owns some of the factors of production, usually in key industries like electrical utilities, telephone networks, transportation – things of national concern. E.g., Sweden, Poland, France

Characteristics of the U.S. Economy The Free Enterprise System 1. Individuals may own private property and enter into contracts. Private property is what things people or businesses own; no limits; eminent domain issue. Contracts are agreements to buy and sell goods/services. Without private property and contracts, market economies will not be able to function 2. Self-Interest (“invisible hand; leads to betterment of society) 3. Individuals may compete economically: Encourages producers and laborers to improve businesses develop better products and services at lower prices as a basis for selling more than rivals individuals seek out education, training, experience to better qualify themselves over other individuals. 4. Limited government involvement and regulation government interference in the market generally not good thing (price ceilings and floors) government regulation of pollution, health and safety in the workplace, banking practices, discrimination, etc. are healthy roles for gov’t in a market economy.  tax system for providing public goods and services like education, national defense, roads, and assistance for poor, sick, and for businesses.