Economic Systems 1

Scarcity Means There Is Not Enough For Everyone Government must step in to help allocate (distribute) resources 2

The 3 Economic Questions Every society must answer 3 questions: 1.What goods and services should be produced? 2.How should these goods and services be produced? 3.Who consumes these goods and services? 3

The way these questions are answered determines the economic system Economic system- the method used by a society to produce and distribute goods and services 4

Traditional Economies Most of our actions come from habit & custom Why do Americans eat Turkey on Thanksgiving? Why do we leave tips in restaurants? These practices have become American culture

In societies with a traditional economy, the allocation of scarce resources, & all other economic activity, stems from ritual, habit, or custom Habit & custom dictate most social behavior Roles are defined in society by customs of their elders & ancestors Ex: Central African villages, Australian Aborigines, ancient Native American communities

Advantages (know 1) People know which role they play Little uncertainty over WHAT, HOW, & for WHOM to produce Tradition dictates how people live their lives 7

Disadvantages (know 1) Discourages new ideas & new ways of doing things Strict roles may punish people who act differently or break rules Lack of progress may lead to a lower standard of living…or death! 8

Command Economy AKA Communism/Socialism Economic decisions made by the government: people have little, if any, influence over how the basic economic questions are answered Ex (know 1) North Korea, Cuba, China, Saudi Arabia 9

Advantages (know 2) Low unemployment-everyone has a job Great Job Security-the government doesn’t go out of business Equal incomes means no extremely poor people Free Health Care 10

Disadvantages (know 2) No incentive to work harder No incentive to innovate or be creative No Competition keeps quality of goods poor Corrupt leaders Few individual freedoms 11

Why has Communism/Socialism failed? If consumers want computers and only one company is making them… Other businesses CAN’T start making computers 12

NO COMPETITION = higher prices, lower quality, & less product variety More computers wont be made until the govt creates a new factory End Result: A shortage of goods consumers want, produced at the highest prices and the lowest quality 13

Market Economies AKA Capitalism Little government involvement in the economy (Laissez Faire = Let it be) Supply, demand, & the price system help people make decisions & allocate resources People & businesses act in their best interest to answer WHAT, HOW, & FOR WHOM questions 14

A market is just an arrangement where buyers & sellers can exchange goods (could be anywhere) People’s decisions act as votes What people buy w/ dollars is a vote for that product These “votes” let producers know what people want 15

How the free market regulates itself: If consumers want computers and only one company is making them… Other businesses have the INCENTIVE to start making computers to earn PROFIT 16

=COMPETITION = lower prices, better quality, & more product variety We produce the goods and services that society wants, “resources follow profits” The End Result: Most efficient production of the goods consumers want, with the lowest prices and the highest quality 17

Society’s goals will be met as individuals seek their own self-interest Ex: Society wants fuel efficient cars… Profit seeking producers will make more Competition between firms = low prices, high quality, and greater efficiency The govt doesn’t need to get involved, since the needs of society are met Competition and self-interest act as an invisible hand that regulates the free market Invisible Hand Theory 18

19 Companies are greedy Companies must satisfy the needs of consumers, If not they go out of business Companies to outsource US jobs overseas, because they want more profit Attacks Against Capitalism

Only helps the rich US companies put workers in sweatshops Sweatshop workers are not forced labor They work there voluntarily Working conditions are far below US standards, but it’s better than the alternative 20

21 " My concern is not that there are too many sweatshops, but that there are too few." -Jeffrey Sachs, Harvard University Question: Who is to blame for these people being so poor? Answer: Low productivity If a country produces little, it can’t afford to pay it’s workers very much Why do these countries have such low productivity? Corrupt governments, inadequate physical capital & infrastructure, & underdeveloped human capital What does foreign investment bring to poor countries?