The Role of Economic Systems MT 1.4 and 1.5

Why are they needed? How the society makes the three major economic decisions. Systems depend on societies goals. 4 main types: Pure Market, Traditional, Centrally planned, and Mixed.

Traditional The way it has always been done Born to farmers, you will be a farmer Dad is a hunter, you become a hunter Think of parents job, that is what you will become. No choice

No way to improve your lot, no incentives to produce anything except for survival.

What do you think this boy’s father does for a living?

Command/Centrally Planned A central authority makes most of the What, How, and For Whom questions Can change quickly Does not meet needs of the people Very old system, tweaked by Marx and Engles

Stay in your class. No upward mobility in some of these systems, and in others, no private property.

You have two cows, the government takes them and gives you some milk You have two cows, the government takes them and gives you some milk. (communism) You have two cows, the government takes them and sells you some milk. (fascism) You have two cows and give one to your neighbor (socialism)

Free Market/ Capitalism People and Firms act in their own best interests to choose What, How, and For Whom. Buyers and sellers get together to trade (Invisible hand) Based on Adam Smith’s theories Laissez Faire

Incentive to produce is that the producer makes a profit and can have upward mobility in society. Produce things that people believe are needed and make a profit for yourself and the consumer gets what they want. People are free to make decisions about their own private property and abilities. People are free to own, buy, and sell private property as they wish

You have two cows, you sell one and buy a bull, the herd multiplies and you retire a millionaire.

What is a Market? Arrangement that allows buyers and sellers to exchange goods. Exist because no one is truly self-sufficient. Sellers make a profit and buyers satisfy their wants and needs.

Mixed Economy A combo of Pure market, command, and traditional economies Most economies are this way today.