 Basic Economic Questions:  What to produce?  How to produce?  For whom to produce?  Economic System  The organization of an economy, which represents a country’s distinct set of social customs, political institutions, and economic practices 1.4 Economic Systems

 Exactly what it sounds like: everything is based on traditions  i.e. what your dad did you will do  What to produce?  Same as always  How to produce?  Same methods  For whom to produce?  Same customers Traditional Economy

 Positives  Very stable and predictable  Negatives  Poor at adaption  Limited Choices  Very Rare  Attacked by increased expectations Traditional Economy Cont’d

 Inuit of Northern Canada  For thousands of years, Inuit parents have been teaching their children the survival skills that they need to survive in the severe climate of the Arctic Circle  The children are taught how to fish, hunt, and make traditional tools  If a walrus or bear is caught, hunters divide it evenly into as many pieces as there are heads of families in the hunting party  The hunter most responsible for the successful hunt has first choice, the second-most helpful hunter chooses next, and so on Example of a Traditional Economy

 Everything is based on consumer sovereignty  You decide  What to produce?  Whatever consumers want  How to produce?  Cheapest and most efficient way possible  For whom to produce?  Whoever will buy Market Economy

 Positives  Innovation  Flexibility  Efficiency  Negatives  If it isn’t profitable, don’t do it  Cut-throat  Intangibles  Human Costs Market Economy Cont’d Resource Markets Product Markets

 Resource Market  Markets in which economic resources are traded  Product Markets  Markets in which consumer products are traded Market Economy Cont’d Resource Markets Product Markets

 Opposite to a Market Economy  Command Economy  An economic system based on public ownership and central planning  Rather than production being based on consumer wants, command economies rely on planners to decide what should be produced, how production should be carried out, and how the output should be distributed Command (Planned) Economy

 Positives  Easy on the consumer  Direction of resources to who you feel needs them  Negatives  Hard to predict the future unknowns  Lack of freedom Command Economy Cont’d

 Most countries fall between the extremes of traditional, market and command economies  Modern Mixed Economy  An economic system that combines aspects of a market economy and a command economy  Production decisions are made in both private market and by government  Traditional Mixed Economies  Economic systems in which a traditional sector co-exists with modern sectors Mixed Economies

 Mixed Economies – USA & China

 Circular Flows  The circulation of money and the circulation of consumer products and economic resources in the economy  Consumer Sovereignty  The effect of consumer needs and wants on production decisions  Invisible Hand  The tendency for competitive markets to turn self-interested behaviour into socially beneficial activity  Or, stated a different way:  “[t]he invisible hand is essentially a natural phenomenon that guides free markets and capitalism through competition for scarce resources.” Definitions

 Private Sector  The part of an economy in which private markets dominate  Public Sector  The part of an economy in which governments dominate  Traditional Sector  The part of an economy in which custom and traditional production techniques dominate Private, Public & Traditional

 Income Equity  Achieved when a country’s total output is distributed fairly  “What is fair”? Is it fair that the salary of a bank executive is hundreds of times higher than the year’s wages of a part-time gardener?  Since value judgment comes into play, satisfying income equity is controversial  Price Stability  Government tries to minimize the country’s rate of inflation (rise in general level of prices)  Purchasing power falls  Peoples incomes don’t necessarily increase Economic Goals

 Full Employment  Government wants to minimize involuntary unemployment  Labour Force: those working and those involuntarily unemployed and actively seeking employment  Unemployment Rate: the percentage of a labour force that is involuntarily unemployed  Viable Balance of Payments  Due to Canada’s dependence on foreign markets, it is important that Canadian imports and exports roughly balance one another  Economic Growth  Outward shift in PPF curve  Helps raise average standard of living in a country  Good for emerging economies trying to eradicate extreme poverty Economic Goals

 Economic Efficiency  Getting the highest benefit from an economy’s scarce resources  Scare economic resources need to be employed in a way that maximizes utility  Environmental Sustainability  While economic activity is carried out, the physical environment should also be sustained without significant harm  Significant changes in the climate recently have been attributed to irreversible damage to the climate via economic activity Economic Goals

 Complementary Goals  Reaching one economic goal makes the other one easier  e.g. Full Employment and Economic Growth  Conflicting Goals  Attaining one goal makes another goal more difficult to achieve  e.g. Price Stability and Full Employment  These issues are resolved by making priorities, where one goal is achieved at the cost of another Economic Goals