Economic Systems
The 3 Major Production Questions What to produce? How to produce? For whom to produce? We will classify economic systems into categories, based on how each of them attempts to answer these three questions.
Traditional Economy The answers to the three major production questions are dictated by: Ritual Habit Custom
Traditional Economy What to produce Tradition answers this question How to produce Custom, hunt the same way in same place Who gets what is produced Custom, divide based on role in the hunt Split depending on size of family Who owns the resources Members of tribe
Examples of Traditional Economies Inuit tribe Some parts of South America Some parts of Africa Aboriginal tribes of Australia Some island societies
Traditional Economies Advantages?Disadvantages?
Command Economy The answers to the three major production questions are given by some strong central authority (e.g. the government) Communism – an economic system in which all factors of production are the property of the state.
Examples of Command Economies Cuba
Examples of Command Economies North Korea
Command Economies Government controls important parts of economy Transportation, communication, banking, and manufacturing Businesses are owned/controlled by gov’t Gov’t sets wages, decides who works what job
Decision Making Central planning group Determines what to produce, how to produce it, and how much Must ensure there are enough workers and resources to produce Consumers have little to no choice
Command Economies Strengths Weaknesses
Market Economy Businesses and individuals act in their own best interest to answer the three major production questions. Capitalism – an economic system in which individuals and businesses compete, with a minimum of government interference “Laissez-Faire”
Market Economy All economic decisions made through “bargaining system” Any store No one person or group runs a market economy— everyone plays a role Produces competition in every aspect
Profit Seeking Profit is the difference between the total cost of production and the total revenues received from buyers Determines how much to produce Invest Use your money to help a business get started or grow Help business to earn a profit
Market Economies Strengths Weaknesses
Mixed Economies Mixed-Market Socialism Economies in Transition
Total Government Control No Government Control CommunismSocialismMixed-Market Capitalism Little Economic Freedom Total Economic Freedom
RankCountryOverallChange 1Hong Kong Singapore Australia New Zealand Switzerland Canada Chile Mauritius Denmark United States Index of Economic Freedom: The Top 10
Bottom 5
Role Players in the Mixed-Market Economy Consumers Producers Government Consumer Producer Protector Regulator Provider
7 Economic & Social Goals of Capitalism 1. Economic Freedom – Choice 2. Economic Equality - 3. Economic Security – Stability 4. Economic Growth – More competition 5. Economic Efficiency – Less waste 6. Price Stability -inflation and deflation 7. Full Employment – Leads to more consumption
Communism Communism: How/Why does it rise? How/Why does it fall?
Capitalism Communism
Capitalism Communism
“From each according to his ability, to each according to his needs!” Karl Marx Critique of the Gotha Programme, 1875
“As for me, I am not a Marxist.” Karl Marx
Why Doesn’t It Work? Incentive Problem Average Test Scores Example Coordination Problem In one word, why doesn’t it work? GREED
When CAN It Work?
CharacteristicCapitalismCommunism Primary Economic Goal Basis of Economy Resource Allocation Government Planning Ownership of F.O.P. Motivation Economic Freedom Economic Equality Competition Cooperation / Collectivization Supply & Demand Government Planning Private Property Public Property Profit Motive Patriotism: The Good of Community
Characteristics of Free Enterprise Capitalism Economic Freedom Voluntary Exchange Consumer Sovereignty: The consumer drives the market “The customer is always right!” Private Property Rights The Tragedy of the Commons Profit Motive