Economic Systems

Three Basic Economic Questions What will we make? How will we make it? Who gets it? 1 2 3

Two Modern Approaches Planned Economies Market Economies

Who Owns the Factors of Production? Land Labor Capital Entrepreneurship

Planned Economy: Communism “The theory of communism may be summed up in the single sentence: abolition of private property.”

Planned Economy: Communism True communism a classless society Everyone owns the factors of production Everything distributed equally

Advantages of Communism Greater income equality Full employment Consumers receive basic necessities

Disadvantages of Communism Lack of incentive Low quality goods and services Lower standards of living

Examples of Communism China, Cuba, & the former Soviet Union… …except not really. No country has ever TRULY been communist

Socialist Philosophy Socialism = many economic rules (fewer rights) Price controls High taxes Cheap or “free” healthcare, education Safety for workers Democratic

Planned Economies If gov’t is completely in control of economy, it is a command economy Even decides # of shoes to be produced!

Market Economies Also called capitalist economies Individuals own factors of production Gov’t stays out Gov’t has a laissez-faire approach to production, commerce, & trade

Market Economies Businesses make things, not to do good for mankind, but to make dat $$ MoNeY $$ Since consumers get to choose, producers need to make product with the right features at the right price “Invisible Hand” of economy

Example: Cars If consumers prefer one company’s car, that business will profit more & have incentive to produce more cars Car companies that don’t will disappear

The Invisible Hand Businesses & individuals meet society’s needs when they seek own self-interest Competitive markets w/ profit-seeking businesses have incentive to produce high-quality products as efficiently as possible

Advantages of Capitalism High-quality goods and services Higher standards of living

Disadvantages of Capitalism Greater unemployment Frequent economic recessions Greater income inequality

Mixed Economies “Modern economies are neither completely free market nor planned. There’s a spectrum of government involvement.

Mixed Economies Most modern economies have free markets AND gov’t intervention

My Pizzeria How would my pizzeria function under different economic systems?

My Pizzeria in a Free Market I answer the basic economic questions! I determine how much cheese and pepperoni goes on the pizza I determine the quality of the cheese and pepperoni I set my employees wages I set my business hours

My Pizzeria in a Command Economy The government answers the basic economic questions The government sets the amount of cheese and pepperoni on each pizza The government determines quality of cheese and pepperoni The government sets employees wages The government sets business hours Problem: What does the government know about pizza?

My Pizzeria in a Mixed Economy The Government and I both answer the basic economic questions I determine the amount of cheese and pepperoni on the pizzas; government determines the quality of cheese and pizza I set employee wages; government sets minimum wage for employees I determine business hours; government determines whether I am safe to be open or not

A Range of Economic systems Depends on Economic Rights Command Mixed Free Market USSR Cuba North Korea Sweden UK Hong Kong Dubai Singapore Germany South Africa France China Canada Greece Peru