Economic Systems Chapter 1.3

1-3 Economic Systems Goals / “I can…” ▫Identify the 3 economic ?s ▫Differentiate among the main types of economic systems ▫Describe the economic systems of the United States

Every society has some system that transforms that society’s scarce resources into useful goods and services.

Key Economic Questions 1.What goods and services are to be produced? ▫What is needed? ▫What is wanted? 2.How should the goods and services be produced? ▫What methods/machinery/technology? ▫What resources should be used? 3.For whom should the goods and services be produced? ▫Who needs them? ▫Who wants them?

What to Produce? Nations differ in their wants like people do. ▫Providing technology vs. providing food, clothing, and shelter ▫Emphasis in space travel vs. military force Meeting everyone’s wants is a challenge. ▫Decisions must be made on which kinds of goods and services are valued the most and best serve the nation.

How to Produce? What combination of resources can be used most effectively and efficiently? ▫Human resources? ▫Natural resources? ▫Capital resources? What resources are available to use?

For Whom to Produce? What citizens will benefit from the production of goods and services? Whose needs and wants are the most critical? How will the goods be distributed? Should the goods and services be shared equally? In the U.S., with our plentiful supply of goods & services, what you buy is largely determined by the amount of money you have and are willing to spend

Types of Economic Systems Economic system: ▫A country’s economic system is classified based on how the country satisfies needs and how resources are distributed. Four basic systems: ▫Traditional ▫Command - the government answers the basic economic questions ▫Free Enterprise/Market Economy – the individuals interact in the marketplace to answer the basic economic questions. ▫Mixed – ALL economies are mixed

Types of Economic Systems Traditional EconomyTraditional Economy ▫centers on families, clans, or tribes  decisions are based on customs and beliefs ▫Good of the group always comes before individual desires Bartering ▫Exchange of goods done through Bartering  trade w/o $$

Characteristics of Traditional Economies Advantages and DisadvantagesAdvantages and Disadvantages ▫Advantages: ▫Advantages: little disagreement over goals, roles  methods of production, distribution determined by custom ▫Disadvantages: ▫Disadvantages: as result of resistance to change, less productive  do not use new methods; people not in jobs they are best suited for  low productivity results in low standard of living  change & growth occur slowly  countries are less developed

Types of Economic Systems cont. Command EconomyCommand Economy ▫(centrally planned economy) government makes economic decisions  determines what to produce; how to produce; who gets products  determines who is employed, work hours, pay scales ▫Wants of individual consumers rarely considered ▫Government owns means of production: resources and factories

Economic Systems Controlled / Command  In a Controlled / Command economy the government controls all resources.  Cuba has a state-controlled planned economy.  Most of the means of production are owned and run by the government.  Most of the labor force is employed by the state.  The Cuban government sets most prices and rations goods.  Any firm wishing to hire a Cuban must pay the Cuban government, which will pay the employee in Cuban pesos.  The average wage for a Cuban is 334 regular pesos per month ($16.70 per month). Video: Will Cuba’s Economy Change?

Government Controls EXAMPLE: Socialism and Communism ▫Karl Marx influenced some societies to adopt command economies  Socialism  Socialism—government owns some of the factors of production  Communism  Communism—no private property; little political freedom ▫Authoritarian system requires total obedience to government  communism is authoritarian socialism

Government Controls Socialism & CommunismSocialism & Communism ▫Democratic socialism established under democratic political process  government owns basic industries  other industries private  central planners make decisions for government-owned industries  central planners might control other sectors, such as health care

Command Economies Today No pure command economies today  modern telecommunications bringing about change ▫Some economies still have mostly command elements

Command Economies Today North Korea ▫Communist North Korea used resources for military, not necessities  built large army; nuclear weapons program  In 1990s and early 2000s, millions died of hunger, malnutrition  In 1990s, production decreased and economy shrank  Since 2003, some market activity allowed

Command Economies Today Impact of Command Economies ▫In theory, command systems fair to everyone; In practice, many disadvantages  central planners do not understand local conditions  workers have little motivation to be productive or conserve resources  artificially low prices lead to shortages  people sacrificed to carry out centrally planned policies

Types of Economic Systems cont. Market / Free Enterprise Economy (USA) ▫Based on independent decisions by businesses & consumers with limited government regulation.  consumers spend money, go into business, sell their labor as they wish  producers decide how to use their resources to make the most money ▫Consumers, producers benefit each other when they act in self-interest

Features of our Economic System 1. Private Enterprise 2. Private Property 3. Profit 4. Competition 5. Freedom of Choice

Fundamentals of a Market Economy 1: Private Property and Markets 2:Limited Government Involvement ▫Laissez faire ▫Laissez faire—government should not interfere in economy ▫Capitalism ▫Capitalism—system having private ownership of factors of production  says producers will create products consumers demand  no one tells consumers what to buy ▫Actual market economies all have some government involvement

Fundamentals of a Market Economy 3: Voluntary Exchange in Markets ▫Voluntary exchange—traders believe they get more than they give up ▫Marketplace ▫Marketplace – any place where G&S (or $$) are exchanged 4: Competition and Consumer Sovereignty ▫Consumer sovereignty—buyers choose products, control what is produced ▫Competition controls self-interested behavior  sellers offer low price or high value to please consumers, make profit

Fundamentals of a Market Economy 5: Specialization and Markets Specialization ▫ Specialization—people concentrate their efforts in the activities they do best  encourages efficient use of resources  leads to higher-quality, lower-priced products

Economic Systems  Characteristics of Free Enterprise: competition  Laws encourage competition - the rivalry between 2 or more businesses for customer dollars.  Price  Price competition – focuses on the selling price of a product or service.  Non-price  Non-price competition - focuses on factors that are not related to what the product sells for. Yankees have highest ticket price so their focus must be on something other than price.  Competition encourages businesses to develop new products and services. monopolies  Antitrust laws make monopolies illegal – when one business controls the entire market for a good or service. profit motive  The profit motive encourages businesses to efficiently provide products, at a profit, that consumers need & want.  Consumers cast their “economic vote” when they decide what to purchase.

Why are glasses so expensive? 1.Where is the global headquarters of Luxottica? 2.Name the eye wear retailers owned by Luxottica. 3.Do you feel that Luxottica has control over the prices consumers pay for glasses? 4.If monopolies are illegal in the United States does this mean that Luxottica is NOT a monopoly? Video: Is Luxottica a Monopoly?

Impact of Market Economies AdvantagesAdvantages ▫Individuals free to make economic choices, pursue own work interests ▫Less government control means political freedom ▫Locally made decisions mean better use of resources, productivity ▫Profit motive ensures resources used efficiently, rewards hard work  resulting competition leads to higher-quality, more diverse products

Impact of Market Economies DisadvantagesDisadvantages ▫Pure market economy has no way to provide public goods and services ▫Does not give security to sick or aged ▫During U.S. industrial boom, business owners rich, workers low pay ▫Businesses did not address problems caused by industrialization ▫Industrialized societies adopt some government control of economy

Today’s Mixed Economies Mixed economyMixed economy ▫has elements of traditional, command, market systems  most common type of economic system ▫Traditional, command, market economies adopt elements from others

Today’s Mixed Economies Life in a Mixed Economy ▫Family farming in U.S. serves as example of mixed economy  traditional: all members of family help bring in harvest  command: affected by government—public school, roads, Social Security  market: own land, sell their products in competitive market

Today’s Mixed Economies Types of Mixed Economies ▫U.S. basically has market system ▫European countries greater mix of market and command elements  France—government controls some industries; provides social services  Sweden—state owns part of all companies; lifelong benefits, high taxes  Namibia—traditional; state supports market, foreign investment

Trends in Modern Economies Changes in Ownership ▫Nationalize is to change from private to government ownership ▫Privatize is to change from government to private ownership

Mixed Economies Most democratic countries fall in this category (there are no truly pure Market or Command economies). ▫Examples: Brazil, Mexico, Canada, UK, US, Germany, Russia, Australia, etc.

Economy Continuum CommandMarket CubaRussia Germany US Australia UK

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