Economic Systems

What is an economic system? An organized way of providing for the wants and needs of the people. An organized way of providing for the wants and needs of the people. The way a society answers the three basic economic questions determines the type of economic system it has. The way a society answers the three basic economic questions determines the type of economic system it has.

Traditional Economy Answers to basic questions come from custom, religion, ritual. Answers to basic questions come from custom, religion, ritual. Examples : African Mbuti, Australian Aborigines, Inuits of Canada. Examples : African Mbuti, Australian Aborigines, Inuits of Canada.

Advantages/Disadvantages of Traditional System *Advantages : everyone knows what role to play; little uncertainty exists. *Disadvantages : discourages new ideas, lack of progress, lower standard of living.

Command Economy Basic questions are answered by a central government. Basic questions are answered by a central government. Examples : North Korea, Cuba Examples : North Korea, Cuba

Advantages/Disadvantages of a command economy Advantages : can change drastically in a short time; many services offered at little or no cost. Advantages : can change drastically in a short time; many services offered at little or no cost. Disadvantages : does not meet needs of people; no incentives; large bureaucracy; new ideas discouraged. Disadvantages : does not meet needs of people; no incentives; large bureaucracy; new ideas discouraged.

Market Economy Basic questions are answered by people and firms acting in their own best interests. Basic questions are answered by people and firms acting in their own best interests. Examples : United States, Canada, Japan, Singapore Examples : United States, Canada, Japan, Singapore

Advantages/Disadvantages of the Market System Advantages : can adjust to change gradually; individual freedom; variety of goods/services; lack of government interference. Advantages : can adjust to change gradually; individual freedom; variety of goods/services; lack of government interference. Disadvantages : rewards only productive resources; basic needs not met for everyone; some uncertainty. Disadvantages : rewards only productive resources; basic needs not met for everyone; some uncertainty.

Evaluating Economic Performance Economic and Social Goals

Economic Efficiency How well scarce resources are used; keep production costs as low as possible. How well scarce resources are used; keep production costs as low as possible.

Economic Equity Fair Fair Distribution of income and wealth Distribution of income and wealth Equal opportunity Equal opportunity Plaintiffs in class-action suit against WalMart

Economic Freedom Freedom for Freedom for Consumers Consumers Workers Workers individuals individuals

Economic Growth * Increasing the production of goods and services over time (GDP growth)

Economic Security Protect consumers, producers, and resources from risks that exist in society Protect consumers, producers, and resources from risks that exist in society (recession, injury, unemployment, etc.)

Economic Stability Maintain stable prices Maintain stable prices Full employment Full employment

Trade-offs among goals Sometimes there is conflict between goals. Sometimes there is conflict between goals. Example : raising the minimum wage Example : raising the minimum wage Equity v. price stability

Which goals would be served? Which goals restricted? A 10% tax is placed on the use of tanning booths. Now Snooks has to spray-tan. A 10% tax is placed on the use of tanning booths. Now Snooks has to spray-tan. New rules for unemployment benefits limit the length of time individuals can receive unemployment checks. New rules for unemployment benefits limit the length of time individuals can receive unemployment checks.

Capitalism and Economic Freedom A free enterprise economy has five main characteristics: A free enterprise economy has five main characteristics: Economic freedom Economic freedom Voluntary exchange Voluntary exchange Private property rights Private property rights Profit motive (incentives) Profit motive (incentives) Competition Competition

The economic system of the U.S. In the United States, our economic system is In the United States, our economic system is -primarily a market system…. …with some elements of tradition… …and some elements of command… …so it is more accurately called a mixed market economy, or modified free enterprise economy.