Economics 2012 HappyEdugator

Economics Economics is the study of how people use scarce resources to meet unlimited demand. Some people describe economics as the study of supply and demand. What people have vs. What people want 2012 HappyEdugator

Economic Systems Answer the Following Questions… What to produce? How to produce? For who to produce? Sometimes this will be described as… “How to distribute?” 2012 HappyEdugator

Traditional Economy Before the invention of money, civilizations and small communities use to barter for goods. Bartering is the process of trading one good for another. The problem with bartering is that it is not always easy to find the person who has the good you want and often it can mean carrying a heavy load in order to make a trade. 2012 HappyEdugator

Traditional Economy Money is not only easier on your back, but it makes trading simpler and faster because you don’t necessarily need the specific good the other person in the trade desires, you simply need cash. 2012 HappyEdugator

Market Economy A market economy is one in which decisions about what is produced, how it is produced and who consumes it are left entirely to individual producers and customers. 2012 HappyEdugator

Market Economy Another word for market economic systems is capitalism. Capitalism is an economic and political system that promotes the absence of government. Government must not interfere with the economy or it may disrupt trade and the people’s ability to prosper. 2012 HappyEdugator

Characteristics of Market Economy Entrepreneurship and risk taking are rewarded with big financial gains. Private property rights are strictly enforced even when they result in many poor people and few very wealth people. Producers decide what to produce based on consumer tastes and demands. Productivity results in more personal wealth. Government’s role in the economy is limited. The economy is based almost entirely on supply and demand. Private individuals and companies own business and industry. 2012 HappyEdugator

Criticisms of a Market Economy Market economies often result in unequal societies where there are a few wealthy individuals and many poor people. Market economies often encourage free trade that enable large private companies to exploit laborers or the resources of less-developed countries. For instance, a lot of the clothing worn by Americans is made in China by workers who earn less than a $1 an hour. Market economies often result in economic monopolies (when one company controls a business sector) that stop competition and result in higher prices. 2012 HappyEdugator

Examples of Market Economy To a large extent, the US has a market economy. Compared to the rest of the world, taxes are low and supply is determined by demand. In reality, there is no such thing as a true market economy because the government in almost every country around the world plays a role in the economy… including the US. 2012 HappyEdugator

Command Economy Critics of capitalism or market economies claimed that they resulted in a few people ruling over the masses. Their solution was to redistribute the goods equally. This revolution came to be known as communism and its economy was known as a command economy. A command economy is one in which all production and consumption decisions are made by the authorities. This usually means that the government makes them. The government controls all aspects of the economy. 2012 HappyEdugator

Characteristics of a Command Economy The government controls all aspects of the economy. Private property is illegal. Supply and demand are determined by the government, not by the consumers and producers. Everyone is paid equally no matter what job they do. Industry and businesses are owned and controlled by the government, not private individuals. 2012 HappyEdugator

Criticism of Command Economies Command economies are inefficient and reward unproductive workers. Critics claim that since workers are awarded the same amount of money for doing every job, workers aren’t productive. Command economies result in illegal markets. Because the government controls the distribution of goods, individuals begin to sell things illegally. Command economies cease to stay competitive in the world because competition and entrepreneurship is discouraged. 2012 HappyEdugator

Examples of a Command Economy In the former Soviet Union, the government killed small property owners and redistributed their land to workers. The government controlled all aspects of Soviet life including food and goods distribution. In Cuba, all residents are given rations of foods. Instead of purchasing food in a market, Cubans go to government food supply centers. Castro and others established a command economy by expelling Cuba’s small business and land owners. Many of those who lost their businesses now live in Miami. 2012 HappyEdugator

Mixed Economy These two systems, the market and the command economy, are really extreme cases. In practice no economy is wholly a market or wholly a command system. All real economies combine elements of both. They are mixed economies. Some decisions are left to the market and some made by, or at least strongly influenced by, the government. The government tends to own major industries like utilities, health care and major manufacturing industries, while individuals own most small business. Mixed economies tend to tax their citizens more than market economies, but less than command economies. Mixed economies are also referred to as socialism. 2012 HappyEdugator

Characteristics of a Mixed Economy The government controls large industries, while private individuals control small businesses. Citizens are taxed heavily to provide all citizens a social safety net such as welfare, free university tuition, and free health care. Property is controlled by both the government and private individuals. Workers tend to be somewhat less productive than those in market economies, but more productive than those in command economies. Consumers generally have a wide variety of choices. 2012 HappyEdugator

Criticisms of Mixed Economies Critics of mixed economies claim that they often result in unproductive workers because there is not as much incentives to work hard as in a market economy. As a result, mixed economies often suffer from higher unemployment rates and lack of the same number of entrepreneurs. Mixed economies often must raise taxes in order to sustain all of the social services such as welfare, free health care, low cost university education, and pension systems for the elderly which can lead to a stagnant economy. Critics claim that mixed economies also enable irresponsible behavior. 2012 HappyEdugator

Examples of Mixed Economies President Franklin Roosevelt introduced the principles of a mixed economy to the US by expanding the government, providing welfare and establishing Social Security for the elderly. In France, health care is free, university costs very little if you get in (many do not) and taxes are high. However, there are also private industries based out of France like Air France. In United Kingdom, health care is free and university is cheap. However, citizens can purchase private health insurance and attend private universities to improve quality if they choose. 2012 HappyEdugator

Review Define: Market economy Command economy Mixed economy 3-2-1 Summarize: What are 3 characteristics of each economy, 2 criticisms of each economy, and which economy do you prefer and why? 2012 HappyEdugator