Economic Systems

WHAT IS ECONOMICS? Economics - the study of how people meet their basic needs Economists - People who study economics.

THE PROBLEM OF SCARCITY Economist believe that the basic problem of economics is the problem of scarcity. Something is scarce when we do not have enough of it.

THE PROBLEM OF SCARCITY 2 basic ideas of Scarcity: People usually have unlimited wants. A society can produce only a limited number of things at any one time There are many things each of us wants. Even if we have them all, we would most likely find new things that we wanted. There is only a certain amount of available goods and services. Therefore, a society cannot fulfill all of everyone’s wants

THE PROBLEM OF SCARSITY The problem of scarcity involves 2 basic ideas: A society can produce only a limited number of things at any one time There is only a certain amount of available goods and services. Therefore, a society cannot fulfill all of everyone’s wants

WHAT ARE GOODS AND SERVICES? Goods - things that people make; for example: foods, toys, clothes, cars & houses. Services - things that people do for others, examples: electricians, teachers, plumbers, doctors & mechanics

APPLYING WHAT YOU HAVE LEARNED Suppose that everyone in the world were given 10 million dollars. Do you think that would end the problem of scarcity? Explain your answer.

THE FUNDAMENTAL ECONOMIC QUESTIONS Because every society has limited resources, no society has enough goods and services to meet the unlimited needs and wants of all its members. This problem of scarcity forces every society to answer 3 fundamental economic questions

THE FUNDAMENTAL ECONOMIC QUESTIONS WHAT SHOULD BE PRODUCED? HOW SHOULD IT BE PRODUCED? WHO SHOULD GET IT? Because every society has limited resources, no society has enough goods and services to meet the unlimited needs and wants of all its members. This problem of scarcity forces every society to answer 3 fundamental economic questions

TYPES OF ECONOMIC SYSTEMS Economic system - The way in which a society answers these 3 economic questions 5 economic systems: Traditional Free Enterprise Communist Socialist Mixed

TRADITIONAL ECONOMY Economic Decisions: Custom and tradition determine what should be produced, how it should be produced, and for whom

TRADITIONAL ECONOMY Production: based on custom and time-honored methods. New ideas are discouraged Change and growth proceed very slowly

TRADITIONAL ECONOMY Private Property: is no private property: owned by the family or village in common

TRADITIONAL ECONOMY Trade: very little trade with outsiders, good produce & consumer locally Barter system (trade things for things

PRODUCTION METHODS Traditional economies are generally marked by subsistence agriculture and cottage industries

PRODUCTION METHODS Subsistence Agriculture: primarily involved with feeding themselves from their own land and livestock, there is no surplus, so very little is sold or traded. In most of Africa, Asia, and many parts of Latin America, people are subsistence farmers.

PRODUCTION METHODS Cottage Industries: people use their spare time in their home to produce goods by hand, examples: weave cloth, make furniture and clothes, and Help farm families meet their needs (extra income during winter months)

PRODUCTION METHODS Today, traditional economies are still found in many rural, non-industrial areas. Examples: Bedouins of Saudi Arabia, Aboriginal people of Australia, Bushmen of the Kalahari, Berbers of Algeria

FREE ENTERPRISE SYSTEM Also known as capitalism or the free market system 3 fundamental questions are answered by: Interplay between consumers (buyers) and producers (sellers)

FREE ENTERPRISE SYSTEM Private Property: People have a right to own private property and to use it as they see fit with limited governmental interference Examples: personal possessions, factories, farms, businesses

FREE ENTERPRISE SYSTEM Free Enterprise: People are free to take part in any business, buy any product, or sell any legal product. Businesses are also free to do anything they wish in order to attract customers – such as lower prices, provide better quality goods, advertise, etc.

FREE ENTERPRISE SYSTEM Profit – what remains after the cost of running the business are paid Profit Motive: The ability to make profits is what drives people to risk their money in starting a new business

FREE ENTERPRISE SYSTEM HOW PRICES ARE DETERMINED Supply and Demand: The interaction of supply and demand determine prices in a free market economy. When demand is high, the price goes up If the supply is high but demand is low, the price goes down

INTERACTION OF SUPPLY & DEMAND HIGH DEMAND/ SHORT SUPPLY P R I C E P R I C E LOW DEMAND/ LARGE SUPPLY

FREE ENTERPRISE SYSTEM MAIN FEATURES Supply and demand is the force behind how resources are allocated/assigned. Supply and demand lead to the distribution of resources in the most efficient way possible.

FREE ENTERPRISE SYSTEM MAIN FEATURES Free enterprise economies will eliminate inefficient producers and limit the production of unwanted goods

FREE ENTERPRISE SYSTEM THE ROLE OF GOVERNMENT: Limited government interference BUT, GOVERNMENT: Provides and enforces common rules Maintains a monetary system Provides for the nation’s defense (protection)

FREE ENTERPRISE SYSTEM THE ROLE OF GOVERNMENT: Protects people’s rights to own property Break up or regulate companies that have obtained so much power that they could defy market forces (Monopolies)

FREE ENTERPRISE SYSTEM PRODUCTION METHODS: Commercial agriculture, crop production for distribution to wholesalers and retailers Supermarkets & grocery stores Large-scale commercial agriculture makes production cheaper

FREE ENTERPRISE SYSTEM PRODUCTION METHODS: Commercial industries, goods manufactured in factories for sale throughout the country or overseas

FREE ENTERPRISE SYSTEM EXAMPLES: The free enterprise system exists in such nations as the United States, Great Britain, France, Chile, Japan, Canada, Germany, and Singapore

FREE ENTERPRISE SYSTEM APPLYING WHAT YOU HAVE LEARNED: Think of a good or service you bought recently. Explain how the interaction of supply and demand most likely determined how much you paid for the product.

COMMUNISM Developed in the 1800s by Karl Marx Marx believed that business owners (capitalist) use their wealth to take advantage of workers by taking away most of the value of what they produced

COMMUNISM Workers would eventually rise up and overthrow their capitalist rulers in a violent revolution Communism would be the result

COMMUNISM Role of Government: All major decisions on production, distribution and the use of resources are made by government planners

COMMUNISM Private Property: None, ownership abolished & national ownership of all land, factories, farms, and major resources.

COMMUNISM Cooperation: Communism based on cooperation, all workers should labor together & share equally. The economy is supposed to be run for the benefit of all members In practice, government leaders run things to prepare for true communism

COMMUNISM Major Goal: The goal is to achieve a classless society Equality among all workers

DOWNFALL OF COMMUNISM There once were many Communist states Soviet Union Countries of Eastern Europe China North Korea Vietnam Cuba The Soviet Union and Eastern Europe abandoned Communism in the late 1980’s & 90

DOWNFALL OF COMMUNISM Economies could not keep up with the goods produced by free enterprise systems 2. Without incentives most workers failed to work hard or to do their best 3. Corruption became widespread Bribing government officials for better/more stuff

COMMUNISM TODAY China, North Korea, Vietnam, and Cuba are still Communist countries China, however, has kept it communist political system but has taken steps towards creating a free enterprise economy

SOCIALISM Began in the 1800s as a political movement in response to exploitation of workers in Europe (industrialization) Government owns major industries but allows other industries to function as a free enterprise economy also called “free market socialism” because state not involve planning.

SOCIALISM Some Freedoms View the government as the best protector of workers Some Freedoms

SOCIALISM Role of Government: brings end to poverty by controlling of major resources of the nation (railroads, airlines, radio stations, banks, utility companies) and by providing public services (health care, education, food stamps, housing, etc)

SOCIALISM Economic Decisions: productions, distribution and the use of resources are made by the government.

SOCIALISM Private Property: Major industries are owned by the government Other property is held privately Small businesses and manufacturers

SOCIALISM Major Goal: a fairer distribution of income among all members of society. People’s basic needs (health care, transportation, education, housing) are met for free or at very low cost, but high taxes

EXAMPLES OF SOCIALIST COUNTRIES Sweden and Israel After WWII, most countries in Western Europe However, sold off their public ownership of major industries in the 1980’s and 1990’s in a wave of “privatization”

EXAMPLES OF SOCIALIST COUNTRIES India after its independence in 1947 until 1991 Currently moving towards free enterprise In Africa, Ghana was Socialist but it is now also privatizing its state-owned enterprises

MIXED ECONOMY In the real world, no economy follows any one economic system. Most countries have economies that blend features of each.

APPLYING WHAT YOU HAVE LEARNED Economic Systems What to Produce? How is it Produced? Who Gets it? Traditional Set by tradition & custom Free Enterprise Interaction of producer/ consumers Producers decide how to produce Consumers decide who get products

APPLYING WHAT YOU HAVE LEARNED Economic Systems What to Produce? How is it Produced? Who Gets it? Communism Determined by government planners Socialism Consumers determine who get products