Chapter 2 Economic Systems

Every economy is trying to find the “best” way to distribute scarce resources Every economy is trying to find the “best” way to distribute scarce resources 3 Key Economic ?’s 3 Key Economic ?’s What goods should be produced? What goods should be produced? How should they be produced? How should they be produced? Who consumes these goods? Who consumes these goods?

Goals of an Economy The economic system put in place depends on what priorities a society has The economic system put in place depends on what priorities a society has  Equity  Efficiency  Full Employment  Price Stability  Security  Freedom  Growth

Kinds of Economic Systems Market Capitalism Market Capitalism Also called Free Market, or Free Enterprise Also called Free Market, or Free Enterprise Traditional Traditional Market Democratic Socialism Market Democratic Socialism Usually referred to as Socialism Usually referred to as Socialism Authoritarian Socialism Authoritarian Socialism Also called Communism Also called Communism

Market Capitalism Individuals own resources and means of production Individuals own resources and means of production Basically free from government control Basically free from government control Adam Smith

Market Capitalism People keep the profits from their hard work People keep the profits from their hard work Goals accomplished: Freedom, long term growth, efficiency, price stability Goals accomplished: Freedom, long term growth, efficiency, price stability Goal weaknesses: Security, equity, full employment Goal weaknesses: Security, equity, full employment Adam Smith

Market Capitalism Methods Methods Competition Competition Supply and Demand Supply and Demand Consumer Sovereignty Consumer Sovereignty Low tax rates, Limited government involvement Low tax rates, Limited government involvement Adam Smith

Advantages Free Market Advantages Free Market Advantages Self-Regulating – produces what is needed and wanted with no government interference Self-Regulating – produces what is needed and wanted with no government interference Competition holds prices to the lowest levels while spurring new invention Competition holds prices to the lowest levels while spurring new invention

Advantages Cont. Free Market Advantages Free Market Advantages Consumer Sovereignty – people are free to buy what they want Consumer Sovereignty – people are free to buy what they want Encourages a very high degree of economic growth Encourages a very high degree of economic growth

Disadvantages Free Market Disadvantages Free Market Disadvantages Economic equity and security do not occur in a purely free market Economic equity and security do not occur in a purely free market Market has no incentive to build “public” goods like roads or libraries Market has no incentive to build “public” goods like roads or libraries

Disadvantages Cont Free Market Disadvantages Free Market Disadvantages Spillover costs – some problems created that effect people who didn’t cause them Spillover costs – some problems created that effect people who didn’t cause them Ex. - Pollution Ex. - Pollution

Traditional Economy does things as it always has Economy does things as it always has

Traditional Goal: to maintain the same tradition Goal: to maintain the same tradition Methods: resist new technologies Methods: resist new technologies

Traditional Examples: the Amish in the U.S., tribes living within developed countries Examples: the Amish in the U.S., tribes living within developed countries

Market Democratic Socialism Socialism – term implying redistributing money from the rich to the poor Socialism – term implying redistributing money from the rich to the poor Government owns major means of production (ex. Transportation, Steel, Oil, etc.) Government owns major means of production (ex. Transportation, Steel, Oil, etc.)

Market Democratic Socialism Goals accomplished: More equity and security in the distribution of income, higher employment rate Goals accomplished: More equity and security in the distribution of income, higher employment rate Goals weaknesses: reduced efficiency, freedom, and growth Goals weaknesses: reduced efficiency, freedom, and growth

Authoritarian Socialism (Communism) Government owns all property Government owns all property Total government control of the economy Total government control of the economy Karl Marx

Authoritarian Socialism (Communism) Goals accomplished: equal distribution of income with no social classes, full employment Goals accomplished: equal distribution of income with no social classes, full employment Goal weaknesses: very inefficient, long term economic decline, no freedom, high inflation rate Goal weaknesses: very inefficient, long term economic decline, no freedom, high inflation rate Karl Marx

Authoritarian Socialism (Communism) One political party controls all government planning One political party controls all government planning Realistically becomes a dictatorship Realistically becomes a dictatorship Examples: Old Soviet Union, Cuba, North Korea Examples: Old Soviet Union, Cuba, North Korea Karl Marx

Mixed Economies Attempt to get the best out of free market and central planning Attempt to get the best out of free market and central planning Government takes action to protect consumers when it feels it is necessary Government takes action to protect consumers when it feels it is necessary

For Example, in the U.S.: FDA screens food and drug items to ensure their safety FDA screens food and drug items to ensure their safety Government breaks up harmful monopolies under the Sherman Anti-Trust Act Government breaks up harmful monopolies under the Sherman Anti-Trust Act Government provides welfare benefits to people who cannot find a job Government provides welfare benefits to people who cannot find a job