Economics Chapter 2

What is an economic system?  Reflects the process or system a nation or society follows to produce goods and services.  Determines who answers the 3 basic economic questions.  Reflects the process or system a nation or society follows to produce goods and services.  Determines who answers the 3 basic economic questions.

What are the four types of economic systems? 1. Traditional 2. Command 3. Market 4. Mixed 1. Traditional 2. Command 3. Market 4. Mixed

The Catch Pure traditional, command, and market don’t exist, all economies today are mixed.

Traditional Economies Features  Based on custom and traditions  Children often carry on the role of their parents  If parents were fisherman, you will be fisherman  Sharing is the main goal of these systems  Goods and services produced are distributed among group’s members  Based on custom and traditions  Children often carry on the role of their parents  If parents were fisherman, you will be fisherman  Sharing is the main goal of these systems  Goods and services produced are distributed among group’s members

Traditional Economies Features  Work to benefit everyone, rather than focus on individual needs  How are the three basic economic questions answered?  Work to benefit everyone, rather than focus on individual needs  How are the three basic economic questions answered?

Traditional - Aborigines of Australia

Command Economies Features  Individuals under this system are left with little say  Pure command died out with the feudal system in Europe  King and Queen – power and money  How are the three basic economic questions answered?  Individuals under this system are left with little say  Pure command died out with the feudal system in Europe  King and Queen – power and money  How are the three basic economic questions answered?

Command – Middle Ages Europe

Market Economies Features  Self Interest = impulse that drives people to fulfill their needs and wants  Do what you want, no government control  Incentive = is anything that encourages you to behave in a particular way  Financial reward (bonus); Financial Penalty  How are the three basic economic questions answered?  Self Interest = impulse that drives people to fulfill their needs and wants  Do what you want, no government control  Incentive = is anything that encourages you to behave in a particular way  Financial reward (bonus); Financial Penalty  How are the three basic economic questions answered?

Invisible Hand?  Adam Smith  While individuals work to meet their own needs and wants, self- interest acts as an “invisible hand” that leads them to do what is best for society  Adam Smith  While individuals work to meet their own needs and wants, self- interest acts as an “invisible hand” that leads them to do what is best for society

Mixed Economies  Combination of the 3 models previously discussed 1.Authoritarian Socialism (Communism) 2.Democratic Socialism 3.Capitalism  Combination of the 3 models previously discussed 1.Authoritarian Socialism (Communism) 2.Democratic Socialism 3.Capitalism

Authoritarian Socialism (Mixed Economy #1)  Close to command  Command – King & Queen work for the wealthy  Communism – a dictator tries to ensure everyone is equal  Limited decision making for individuals  Government controls or owns nearly all factors of production  Close to command  Command – King & Queen work for the wealthy  Communism – a dictator tries to ensure everyone is equal  Limited decision making for individuals  Government controls or owns nearly all factors of production

Authoritarian Socialism – Totalitarian Governments  Germany, under Adolf Hitler  the USSR, under Joseph Stalin  China, under the Communist rule of Mao Zedong  Italy under Benito Mussolini  North Korea under Kim Il Sung  Syria under Hafez al-Assad  Iraq under Saddam Hussein  Germany, under Adolf Hitler  the USSR, under Joseph Stalin  China, under the Communist rule of Mao Zedong  Italy under Benito Mussolini  North Korea under Kim Il Sung  Syria under Hafez al-Assad  Iraq under Saddam Hussein

Democratic Socialism (Mixed Economy #2)  Considered to be the middle ground between authoritarian socialism and capitalism  Government ownership of some of the factors of production (utilities, telephone, airlines, etc.)  EX. France, Sweden, Netherlands  Election of government officials  Considered to be the middle ground between authoritarian socialism and capitalism  Government ownership of some of the factors of production (utilities, telephone, airlines, etc.)  EX. France, Sweden, Netherlands  Election of government officials

Capitalism (Mixed Economy #3)  Closest to market  Market has NO government regulations  Free to catch as many walleyes as you want  Government does enact regulations to guide business and protect citizens  Regulations on Fishing  Taxes  Private ownership and free choice are strongly emphasized (Basis of Capitalism)  Closest to market  Market has NO government regulations  Free to catch as many walleyes as you want  Government does enact regulations to guide business and protect citizens  Regulations on Fishing  Taxes  Private ownership and free choice are strongly emphasized (Basis of Capitalism)

Capitalism (Mixed Economy #3)  Individuals own factors of production and answer the 3 basic economic questions  Ex. Canada, Mexico, Japan, United States  Individuals own factors of production and answer the 3 basic economic questions  Ex. Canada, Mexico, Japan, United States

Capitalism U.S., Canada, Mexico, Japan

Goals of United States Economy  Freedom  Efficiency  Security  Stability  Equity  Growth  Freedom  Efficiency  Security  Stability  Equity  Growth

Goals:FESSEG  1. Freedom  -choose occupation.  Business free to change and grow.  Investors free to decide what to do with their money.  1. Freedom  -choose occupation.  Business free to change and grow.  Investors free to decide what to do with their money.

Goals:FESSEG  2. Efficiency -Make best use of our scarce resources. -Can be measured by how many goods and services a nation’s workers produce.  2. Efficiency -Make best use of our scarce resources. -Can be measured by how many goods and services a nation’s workers produce.

Goals:FESSEG  3. Security  -Protect members from poverty, business failures and bank failures, acts of terrorism, and internet crimes  Individual can purchase different types of insurances.  Government promotes security through unemployment compensation, insuring bank deposits.  3. Security  -Protect members from poverty, business failures and bank failures, acts of terrorism, and internet crimes  Individual can purchase different types of insurances.  Government promotes security through unemployment compensation, insuring bank deposits.

Goals:FESSEG  4. Stability - Strive for full employment: lowest possible level of unemployment in the country - Price stability: overall prices remain constant  4. Stability - Strive for full employment: lowest possible level of unemployment in the country - Price stability: overall prices remain constant

Goals:FESSEG  5. Equity -Fairness -Right and wrong -All members of society share costs and benefits. -NOT equality  5. Equity -Fairness -Right and wrong -All members of society share costs and benefits. -NOT equality

Goals:FESSEG  6. Growth -Increase the amount of goods and services produced by each worker -allows consumers to increase consumption -Increase the standard of living. -Measured by how much the average person in that country is able to consume in a given period of time  6. Growth -Increase the amount of goods and services produced by each worker -allows consumers to increase consumption -Increase the standard of living. -Measured by how much the average person in that country is able to consume in a given period of time

Priorities  Individuals, businesses, and the government decide which goals are most important to them.  Needs and wants often conflict  Individuals, businesses, and the government decide which goals are most important to them.  Needs and wants often conflict

Priorities Can Change  1970’s : dramatic price increases encouraged many people to focus on stability  1980’s : concerns about unemployment and low productivity encouraged focus on security and growth  2013:  1970’s : dramatic price increases encouraged many people to focus on stability  1980’s : concerns about unemployment and low productivity encouraged focus on security and growth  2013:

Priorities Can Conflict  People have differing goals  Fargo Flood residents vs. Minneapolis residents  Fargo during flood: What goals?  Now?  Minneapolis: ?  People have differing goals  Fargo Flood residents vs. Minneapolis residents  Fargo during flood: What goals?  Now?  Minneapolis: ?

Mystery Island  Imagine you end up with 200 people on Mystery Island.  What type of mixed economic system would you set up? WHY?  What would be your TOP 3 Economic Goals? WHY?  List 3 Economic RULES/LAWS you would institute.  Imagine you end up with 200 people on Mystery Island.  What type of mixed economic system would you set up? WHY?  What would be your TOP 3 Economic Goals? WHY?  List 3 Economic RULES/LAWS you would institute.