Unit 2 Lesson 7 Economic Systems

Three Economic Systems Remember every economic system has to answer the three basic questions of economics. Economic system– an organized way of providing for the wants and needs of people. 1). Command 2). Market 3). Traditional

Command Economies Economic activity is planned out by the government, with people having little influence. Examples: Cuba North Korea Former Soviet Union

Command Economies - Pros Allows an economy to change direction very quickly. After Stalin’s first two Five Year Plans, Russia moved from a rural agricultural economy to an industrial economy.

Command Economies - Pros Little uncertainty as to who will do what. No unemployment because the government gives everyone a job (whether it is needed or not). Read excerpt from Ayn Rand - Anthem

Command Economies - Cons Not designed to meet the wants of consumers. Stalin’s Five Year Plan directed resources away from both agriculture and consumer goods. Provides strange incentives. Do just enough to meet quotas.

Command Economies – More Cons No rewards for individual performance. No flexibility to handle problems. Great Depression disrupted the USSR’s First Five Year Plan Requires a large decision making agency. Stalin’s Five Year Plans governed all economic activity in Russia…that’s a lot of paperwork!

Market Economies People and businesses act in their own best interests to answer the three basic economic questions.

Market Economies – How they work Lure of personal and financial gain leads consumers and businesses to interact in various markets. Each person acts as they see fit in order to advance their own interests.

The First Economist – Adam Smith “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.” – Wealth of Nations, 1776

Market Economies - Pros Economy can adjust to change over time Businesses can adapt to changing consumer tastes by creating new/different products. High degree of individual freedom Businesses and individuals are free to do what they want.

Market Economies – More Pros Small degree of government interference (Mixed Economy) Economic decisions are made by all, not limited to government officials. Seemingly unlimited variety of goods and services available to consumers.

Market Economies - Cons Does not provide for the basic needs of everyone. Elderly, disabled and other groups would be unable to survive in a market economy without governmental assistance.

Market Economies – More Cons Does not provide certain services that people value. National Defense & Education. High degree of uncertainty Jobs going overseas Market Failures

Traditional Economies Economic activity is based on tradition with roles determined by previous generations. Examples: Medieval Europe Various hunting tribes in Africa and northern Canada

Traditional Economies – Pros Everyone knows what their role is. Life is generally predictable and stable.

Traditional Economies - Cons Discourages new ideas and new ways of doing things. Lack of progress leads to a lower standard of living.

The United States Economic System Mixed Economy Capitalism Based on 4 important principles Private Property Freedom of choice Profit Competition

The United States Four Economic Goals Economic Freedom Economic Equity Economic Security Price Stability

Goal 1 - Economic Freedom Individuals have freedom to choose their own occupations, employers, and spending habits. Businesses have freedom to choose how and where to produce goods/services. Are we meeting this goal?

Goal 2 - Economic Equity People should receive equal pay for equal work. People should receive adequate pay for the work they perform. People should all have the same opportunities to get ahead. Are we meeting this goal?

Goal 3 - Economic Security We should have protection from negative economic events such as layoffs and injuries. Social Security – federal program that provides disability and retirement benefits. Everyone should have their basic needs met. Are we meeting this goal?

Goal 4 - Price Stability We should have stable prices that protect against inflation. Inflation – a rise in the general level of prices. Are we meeting this goal?

When economic goals are not met… …People get mad!!!!!!!

John Mellencamp - Scarecrow As you listen, think about the goals of: Economic Equity? Economic Security?

Economic Systems-Bead Activity Market Command Tradition Progress: Is it Stressed? Choice of Jobs Motivation to Produce How to Produce (Degree of Specialization) What to Produce For Whom to Produce Base Values Highly Stressed To Some Degree Not at All Individual Preference Government Directed Custom Directed Limited Social Gain Traditional Incentives High Self-gain Least Cost Method Least Cost Method Traditional Ways Whatever is Most Profitable Whatever the Government Decides is Needed Whatever was Traditionally Produced Highest Bidder Those Declared in Need Distributed by Customs Competition, Material Rewards, Self-gain, Freedom Cooperation, “Moral” Rewards, Societal Gain, Governmental Decree Custom, Traditional Ways and Beliefs

Closure Identify the three economic systems. Command Economy Objectives Concepts Identify the three economic systems. Command Market Traditional Command Economy Market Economy Traditional Economy