Review Notes In a pure market economy, what is the role of the government? Describe one problem with the pure market economy. Who controls production in a pure centrally planned economy? Describe one problem with the centrally planned economy.

Economic Systems

Economic Systems Economic System: The way a nation organizes, manages, and controls resources (factors of production) and distributes wealth/materials among the population. An economic system is defined by how these factors of production are controlled and distributed

Economic Systems: a Spectrum

Command/Centrally Planned Economy Economic Systems Command/Centrally Planned Economy Market Economy VS. Government manages all or most resources and industries within the nation Government is not involved. Resources are distributed and shared based on “supply and demand.”

Command/Centrally Planned Economy TWO types: Communism: Government owns all factors of production and decides how resources will be used. Socialism: Government owns and controls critical industries, but individuals can run non-critical businesses.

Communism Government controls all factors of production and makes all decisions about which industries will operate. Determines who gets capital, how it is used, and for which industries. Gov’t owns/controls all resources (i.e. labor) Makes decisions to benefit most people No individual ownership; decisions benefit all people, not individuals. Distributes output evenly among all members of society during a given amount of time.

Socialism Gov’t controls critical industries, but individuals can run non-critical businesses. Gov’t provides jobs to citizens and establishes industries depending on people’s needs Individuals can use skills/talents to make a living in non-critical industries Unequal distribution of goods—pay is according to work done

Market Economy/Capitalism Gov’t NOT involved; private firms account for all production. The free market is the mechanism of exchange of goods and services Private ownership of everything Resources distributed based on supply and demand Everything has a price! People must earn capital to purchase goods. Goods distributed unevenly

Pros/Advantages Command Economy Market Economy Wealth/output equally shared among all members of society People get what they deserve Those who study or work hard earn more than those who don’t

Cons/Disadvantages Command Economy Market Economy Everyone gets the same amount of wealth regardless of how hard they worked or studies Leads to low motivation Consumers have little freedom of economic choice Resources wasted GREED Inequality Some have little resources to sell No gov’t exists to protect property rights Externalities: cost not assumed by market transaction

Your Turn… In groups of 3-4, discuss the following scenarios from the perspective of market, communist, or socialist societies. Then, vote on which system is the most effective for each scenario.

Scenario 1 A man who lives in the woods is cold during the winter time, so he goes into his backyard to chop down a tree for firewood. Then, he sells it to his neighbors. How would the government react?

Scenario 2 A farmer in this society produces twenty barrels of apples. How is the harvest used/allocated?

Scenario 3 An extremely talented artist wishes to make paintings and sell them to earn a living. What can the girl do?

Scenario 4 A boy breaks his arm while playing on the playground and he needs to get surgery. How will the boy get medical treatment?

Scenario 5 A medical school is accepting applications for the 2014-2015 school year. How does it determine who is admitted?

Scenario 6 The nation is about to go to war. How does it prepare its military, supplies, and technology?

Mixed Economies Has features of both command and market economies Most nations of the world have mixed economic systems. People have the freedom to pursue their goals Gov’t manages and regulates business: imposes laws for environment, protects wildlife, ensures products are safe, etc. Gov’t provides essential services: Roads, police force, military, healthcare, currency, postal service, etc.