Economic Systems

An economic system is a method used by a society to produce and distribute goods and services.

Three Economic Questions: What goods and services should be produced? ****Society decides what is a society need and what is a society want. How should these goods and services be produced?  ****How to combine land, labor and capital to produce goods and services.

Who consumes these goods and services? ****How do we divide the goods and services? Which system a society uses depends on that society’s goals and values.  

Society’s Goals and Values 1. Economic Efficiency Maximizing what you can get for resources 2. Economic Freedom The opportunity to make our own choices 3.  Economic Security/Prosperity Assuring people that goods and services will be there when they need them

Society’s Goals and Values cont. 4. Economic Equity Society must decide the best way to divide up the economic pie  5. Economic Growth/Innovation An economy must grow for a nation to improve its standard of living 6. Others, depending on the economy Universal health care and environmental protection

Four Types of Economies Traditional Economy Market Economy Command Economy/ Centrally Planned Economy Mixed Economies

Four Types of Economies 1. Traditional Economy Relies on habit, custom, rituals to answer the what, how and who 2. Market Economy Economic decisions are made by individuals based on trade or exchange Individuals decide the what, how and who Higher standard of living

Four Types of Economies 3. Command Economy/ Centrally Planned Economy The government decides the what, how and who 4. Mixed Economies Market- based economic systems in which the government plays a limited role in the what, how and who

Traditional Economies Advantages: Not much room for change Boy follows father; girl follows mother Usually small close, communities Work for the common good not individuals  

Traditional Economies Disadvantages: Unable to deal with natural disasters Resistant to change Low standard of living

Market Economies Market: An arrangement that allows buyers and sellers to exchange goods and services. Markets allow us to exchange things we have for things we need or want. Markets exist due to specialization. People focus on producing what they are best at, and then exchange their surplus outputs. Specialization is the concentration of efforts to produce one thing or a few things. Each of us specializes at a specific job and uses the income to buy the products we consume.  

Market Economies cont.   Self-sufficient communities or households do not need markets. Free Markets: (like the US) Voluntary exchange of goods and services. (Individuals and firms answer the 3 economic questions)

Vocabulary Words 1. Household: A person or group of people living in the same residence.   2. Firm: An organization that uses resources to produce a product which it then sells. 3. Profit: The financial gain made in a transaction

Vocabulary Words 4. Factor Market: Market in which firms purchase the factors of production from households.   5. Product Market: The market in which households purchase the goods and services that firms produce.

Factor Market and Product Market Households Money Goods and Services Firms Factor Market Households Labor, factors of production Money Firms

Factor Market and Product Market Advantages: Economic efficiency  Economic freedom  Economic growth  Consumer sovereignty

What drives the market? self-interest: personal gain is the motivating force in the free market   competition: regulating force INVISIBLE HAND (Adam Smith) incentives (negative and positive): A hope of reward or fear of punishment that encourages a person to behave a certain way (lower prices)

CENTRALLY PLANNED ECONOMIES Centrally planned—or command—economies operate in direct opposition to free market economies. In command economy, the government (bureaucracy) answers the three economic questions (what, how, and for whom to produce)

CENTRALLY PLANNED ECONOMIES The government owns land and capital, and controls labor (government decides where individuals work, how much they get paid) Forces that drive free market, like SELF-INTEREST and COMPETITION, are absent. Consumers don’t make decisions.

SOCIALISM and COMMUNISM SOCIALISM- social/political philosophy that argues wealth should be distributed evenly throughout a society by democratic means

SOCIALISM and COMMUNISM Socialism exists in varying degrees throughout the world Socialists argue that real equality can only exist if economic equality exists Public distribution of wealth is necessary (Socialist societies can be democracies, but require economic central planning) Government controls major industries (utilities, etc.)

COMMUNISM A political system

COMMUNISM Arose from socialism Centrally planned economy (economic/political power in gov’t) Communist governments have historically been authoritarian and have been run by single parties or dictators

MIXED ECONOMIES Most modern economies mix both market and centrally planned systems. The Rise of Mixed Economies: No single system has all the answers

MIXED ECONOMIES The limits of Laissez Faire: economic philosophy that states the government generally should not intervene in the marketplace.

MIXED ECONOMIES In theory, it was believed that the market left to its own would provide the greatest benefit for consumers and raise the standard of living. However, government intervention became necessary because of the needs and wants of society. national defense, roads, education, mass transit worker safety and protection quality in production consumer goods governments create laws protect property rights?? Right of eminent domain (patents, copyrights) anti-trust laws: Microsoft (prevent monopolies)

MIXED ECONOMIES The government also intervened through the 5th & 14th Amendments to American Constitution (protect life, liberty and property) Private property is property owned by individuals or companies, not by the government or the people as a whole.

MIXED ECONOMIES Balancing Control and Freedom Society must assess values and prioritize economic goals Some goals may be better met by the open market? Some goals must have government action? Each nation must decide what to give up in order to meet its goals

Government in the Factor Market like businesses government purchases land, labor and capital from households in the factor market bureaucracy and military (2.8 million employees, 9.7 billion in wages)

Transferring Money government collects revenue (taxes) from both households and businesses revenue ($) is then transferred to a variety of services and products all of which need government employees to oversee Military, Food and Drug Administration, FDA needed? Biggest is social security? / $800 billion these days?

The United States Economy Government intervention for order, vital services and to promote the general welfare In the political continuum of conservatives vs. liberals a. conservatives usually want less government intervention in the market place b. liberals usually want the general welfare of the people protected

The United States Economy USA does have relatively few banking regulations (until now) and foreign Banks do have some restrictions Foreign investment in the USA is encouraged—where do you think the $800 billion came from to bail us out?????