Economic Systems Unit 1

Economic Systems How the government or society will allocate its scarce resources How the government or society will answer the three fundamental questions of economics: WHAT G&S should we produce? HOW we should produce G&S? FOR WHOM are we producing G&S?

Economic Systems Traditional Economy Command Economy Communist or Centrally Planned Economy Market Economy Capitalism or Free Market Economy Mixed Economy

Traditional Economy Allocation of scarce resources is based on ritual, habit, custom Individuals have little say over role in society & economy Tend to be more family- centered Small-knit communities & tribes

Traditional Economy Pros: Everyone knows how to figure out WHAT to produce, HOW to produce, and FOR WHOM to produce Cons: Hard to come up with new ideas and G&S Strict rules against breaking tradition Lower standard of living

Command Economy “Let the ruling classes tremble at a Communist revolution. The proletarians have nothing to lose but their chains. They have a world to win. Working men of all countries, unite!” -Karl Marx, Communist Manifesto

Command Economy The GOVERNMENT owns all resources The GOVERNMENT answers the three fundamental economic questions People don’t need to worry about making profits Examples: Cuba, China, N. Korea, former USSR

Command Economy Pros: Everyone has a job Equal incomes/pay Free healthcare Government won’t go out of business

Wrote Communist Manifesto Command Economy Karl Marx: Wrote Communist Manifesto Doesn’t it sound perfect if everyone gets equal pay, has a job, and doesn’t have to worry about profit since the government is in charge?

Command Economy NO Profit means Incentives Bartok the Bat: Appeared in Anastasia, the VERY historically inaccurate movie supposedly about the aftermath of the Russian Revolution.

Command Economy Cons: Government in charge could be corrupt Little individual freedom No incentives to make better G&S No incentives to work harder No competition

Market Economy “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” -Adam Smith, Wealth of Nations

Market Economy Individuals in the Market own resources The Market (consumers & producers) answer the three fundamental economic questions Market Economy is driven by: Competition Profit Incentives Self-Interest

Market Economy Laissez-Faire: Hands Off! Belief that the economy will function best without government intervention An invisible hand guides the Market to make best decisions

Wrote Wealth of Nations Market Economy Adam Smith: Wrote Wealth of Nations No government involvement + self-interest + competition + invisible hand = Good for Economy

Market Economy Producers/Sellers *Profit Maximizers* Want to: 1) Produce G&S as cheaply/efficiently as possible 2) Produce G&S consumers want to buy 3) Sell G&S for high, but reasonable prices Consumers/Buyers *Cost Minimizers* Want to: 1) Buy G&S as cheaply as possible 2) Buy the best G&S they can afford 3) Be willing to pay a reasonable price for G&S

Market Economy Pros: Lots of individual freedoms High customer satisfaction Lots of varied G&S Cons: Lack of public aid and services Have to worry about market failures

Mixed Economy Combination of both Market and Command Economy