1. ECONOMIC SYSTEMS Chapter 2 Section 3 Command Economies

2. ECONOMIC SYSTEMS – SECTION 2 1. How does specialization make us more efficient? 2. What is the difference between the factor market and the product market? 3. What is profit? 4. What are the roles of households and firms in a market economy? 5. How does competition among firms benefit consumers? 6. Explain what Adam Smith meant by “the invisible hand of the marketplace.” 7. What is the connection between incentives and consumer sovereignty in a free market economy?

3. ECONOMIC SYSTEMS Objectives:  Describe how a Command Economy is organized.  Analyze the Command Economy of the former Soviet Union.  Identify the problems of a Command Economy.

4. ECONOMIC SYSTEMS Command Economies operate in direct contrast to a free market system. Command Economies oppose private property, free market pricing, competition, and consumer choice.

5. ECONOMIC SYSTEMS How is a Command Economy Organized? The Central Government answer the three key economic questions, not the producers and consumers. A central bureaucracy makes all the decisions about what items to produce, how to produce, and who gets them. After collecting information, bureaucrats tell each firm what and how much to produce. It is up to the bureaucrats to ensure that each firm has enough raw materials and workers to meet its production goals.

6. ECONOMIC SYSTEMS Cuba

7. ECONOMIC SYSTEMS

8. North Korea

9. ECONOMIC SYSTEMS Government Control of Factor Resources & Production: The Government owns both land and capital. In a sense, they own the labor as well. The Government controls where individuals work and what wages they are paid. They direct workers to produce a certain number of trucks and so many yards of cotton fabric Farmers are told what to plant, how to plant, and where to sendtheir crops. Workers line up outside a factory to buy shoes.

10. ECONOMIC SYSTEMS Socialism and Communism: Socialism and Communism are usually associated with a centrally planned economy. Socialism – is a philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout a society. Communism – is a political system that arose out of the philosophy of socialism. It is characterized by a Command Economy with all economic and political power resting in the hands of the central government.

11. ECONOMIC SYSTEMS Communist governments are authoritarian in form. They want to control everything in the country. Usually the country is run by a dictator. Vladmir Lenin

12. ECONOMIC SYSTEMS The Former Soviet Union: Soviet Union arose out of a revolution in 1917. Czar Nicholas II was forced from the throne. Lenin took over control of the country. He renamed the revolutionary socialists that helped him take over as Communist and his party was called the Communist Party. The planners of this country concentrated their efforts on building a national power and prestige within the international community.

13. ECONOMIC SYSTEMS The Former Soviet Union: Agriculture: Lenin established collective farms – large farms leased from the state to groups of peasant farmers. These farmers were required to what to produce and they received a share for their hard work. Workers were guaranteed employment and income and had little incentive to produce more or better crops.

14. ECONOMIC SYSTEMS The Former Soviet Union:  Soviet Industry  Mainly put their efforts into Heavy Industries – these industries require large capital investments that produces items used in other industries.  i.e. Chemical, Steel, Heavy Machinery

15. ECONOMIC SYSTEMS Soviet Consumers: Consumer goods were scarce and usually of poor quality. Manufacturers had the incentive to focus on quantity, not quality. Suits were made with no button holes in them. Suits were made with one arm longer than the other. Consumers waited in long lines to get any goods. Housing shortages also took place.

16. ECONOMIC SYSTEMS Problems of Centrally Planned Economies: Central Planning can be used to jumpstart an industry or industries. They can also guarantee jobs for people. The other side is that quality is poor; serious shortage of non-priority goods, and services, and diminishing production. Greatest disadvantage of a Command Economy is that they always fall short of their ideals upon which the system is built. They do not meet consumer needs or wants.

17. ECONOMIC SYSTEMS REVIEW: 1. How do socialism and communism differ? 2. What characterizes an authoritarian government? 3. Why did Soviet collective farms offer little incentive to farmers? 4. In the Soviet Union, what was the opportunity cost of the emphasis on heavy industry?