3 Primary Economic Systems Different Economic Systems Explored Economics

Economic Systems All economic systems allocate scarce resources Every society must choose both an economic & political system

3 Basic Questions Every Economic System must answer 3 questions: 1) What to Produce? 2) Whom to Produce it for? 3) How to Produce it?

3 Types of Economic Systems MARKET COMMAND TRADITIONAL

Adam Smith ( ) Founder of Free Market Economics –He wrote “The Wealth of Nations” in 1776 Argued: Free markets best promote the social welfare Government should not interfere in markets! –The economy is self-regulating through an invisible hand

"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” “We address ourselves, not to their humanity but of their advantages." Adam Smith Self-interest is our incentive to work hard

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Adam Smith’s 2 laws of the Market 1) Self-Interest: People act in their own self-interest Profits or greed motivate individuals (incentive) 2) Competition: Lots of producers keep business “honest” Since business “fears” competition goods are produced at the lowest possible price

Adam Smith 2 Laws in action: People follow their own self-interest Threat of competition keeps people honest Markets naturally self-regulate Invisible Hand Government should not Interfere!

Command Economy Soviet Union “adopted” command economic system –Called communism Government controlled economy (centrally planned) –stressed equality & work for the common good (collective system) Economic Incentive to work hard? Karl Marx 1848 For the collective good!

Self-Regulation vs. Central Planning Market EconomyCommand Economy Shortage of A Good?

Cuba’s Future?

Traditional Economic System Designed to preserve culture of society Change occurs very slowly Gov’t uses strict laws to enforce behavior CHINA

Bhutan Video: Traditional Economy BenefitsCosts min. 3 min

Bhutan June 2011 Typical Village

No traffic lights in Bhutan 2011 Music Video production in Bhutan

Society will choose an economic system based on goals: Economic & Social Which Economic System? Justice Equality Environment Freedom Growth Employment Efficiency Stability GEES-Growth, Efficiency, Employment, Stability

HOW WHAT FOR WHOM MARKET COMMAND TRADITIONAL Economic System Production Growth & Efficiency Supply & Demand Price Equality Gov’t or Central Planner Gov’t or Central Planner Need & Tradition Need NecessityStability GEES-Growth, Efficiency, Employment, Stability

Summary Market systems stress competition –Work “individually” in your own “self interest” –Invisible hand regulates economy Command systems stress equality –Work “collectively” for the common good –Government centrally plans economy Traditional systems stress preservation of culture –Government maintains culture of society

Economic Systems Worksheet