Economic Systems

Economic Goals Most societies share certain basic economic goals. Societies rank the importance of these goals based on their needs and values.

Three Economic Questions What goods and services should be produced? How should these goods and services be produced? Who consumes these goods and services?

Economic Goals How to answer the 3 questions

Economic Systems Traditional Traditional economies rely heavily on habit, custom, or ritual to decide what to produce, how to produce it, and to whom to sell it. Traditional economies are usually small, close communities.

Economic Systems Market In a market economy, individuals make decisions based on exchange or trade; these choices determine what gets made and who consumes goods and services. Market economies are also called free markets or capitalism.

Economic Systems Centrally Planned In centrally planned economies, the central government makes all decisions regarding the production and consumption of goods and services. They are also called command economies.

Economic Systems Mixed Mixed economies combine elements of traditional, market, and centrally planned economies.

Market – is an arrangement that allows buyers and sellers to exchange things Household – person or group of people Firm – organization that creates a product Profit – financial gain made in a transaction

Self-interest – own personal gain Incentive – encourages people to act in a certain way Competition – struggle among producers Invisible hand – self regulating nature of the market place

The Free Market Chapter 2 Section 2 Page 28

The Free Market Markets exist because no on is self sufficient –Did you plant the fibers that are in your clothes? Markets allow for specialization concentrating your skills on a certain good –This leads to efficient use of land –Now you need markets

Adam Smith An economy is made up of thousands of transactions –Buyers and sellers only consider their own self interest Consumers look for the lowest price

Big and tasty not selling? Self interest is to get rid of the product –But producers also want to make money –Struggle amongst consumers for their dollar is called competition

Consumers get products at prices they are willing to buy, with out anyone saying anything – Invisible Hand

Advantages Of Free Market Economic Efficiency – economy responds rapidly Economic Freedom – work where, produce what YOU want Economic Growth – always welcomed if it is profitable Goals – wide variety of goods and services offered

Centrally Planned Economies Central Government decides the 3 key questions (who, what and how) –Collect information then process –Gov. controls the factors of production –No competition or self interest –Lack of a consumer voice

Socialism Socialism – is a social and political philosophy based democratic means should be used to distribute wealth evenly –Real equality exists when political equality and economic equality are matched –This requires a high degree of central planning

Communism Communism – all economic and political power resting in the hands of the gov. –Can only come about through a violent revolution –Authoritarian – extract strict obedience from their citizens, limit freedoms

Soviet Union Bolsheviks led by Vladimir Lenin take over Russia in 1917 –Central planning took place in 1920’s –Factors of Production were geared to the military (military viewed in high esteem) Gov. in charge of 24 million goods and services –Collectives – large farms leased to farmers You needed to meet a quota –You were guaranteed work

Industry –State owned –Invested in heavy industry (steel, chemical) –Left over resources went to consumer goods –Illegal to exhibit entrepreneurial behavior or start their own business

Consumers –“we pretend to work, they pretend to pay us” –Manufactures focused on quantity not quality –Few alternatives were available Problems –Central planning can be used to jumpstart economies –Few goods and services, poor quality –No reward for innovation

Modern Economies Chapter 2 Section 4 Page 40

Mixed Economies No single economy has all the answers Centrally Planned Economies –Limit freedom’s –Cumbersome Traditional –Little potential for growth

Mixed Economies Laissez Faire –Government should not intervene in the economy –Proposed by Adam Smith But… the government should take a limited role Laws, property rights and contracts –Private property – owned by individuals and businesses

Mixed Economies Some goals of an economy are better addressed by the Government –Roads, military, and education Circular Flow Model of a Mixed Economy

Comparing Mixed Economies Free Enterprise – individual or business ownership of goods Centrally Planned –North Korea –Government controls 95% of industry –Other 5%

Mixed Economies China – 25% of Industry –But… China is in transition Moving away from Centrally Planned to a Free Market Privatized – sold to individuals Hong Kong –95% of industry owned by individuals

North Korea United States Hong Kong China Great Britain Centrally Planned Free Market There will never be a complete 100% Centrally Planned or Free Market economy Black Market