1. How do we allocate the available resources?1 2 3 4 5 6 7 8 9

2. Which of these allocation schemes are fair?1 2 3 4 5 6 7 8 9

3. Economist’s have a favourite solution to most economic problems
Auction Write your name on a slip of paper and the MAXIMUM price that you would be willing to pay. Don’t let anyone see your price!

4. Economic Systems

5. Economic Systems
An economic system describes the methods used by societies to produce and distribute goods & services
The economic system a society employs reflects that societies goals and value

6. Q: WHY DOES EVERY ECONOMIC SYSTEMS NEED TO ADDRESS THESE QUESTIONS?
The Three Questions
What goods & services to produce?
allocation of resources
guns vs. butter
How to produce them?
human labor vs. machinery
renewable vs. carbon based energy sources
Who gets to consume them?
distribution based on wealth vs. need
political vs. financial
Q: WHY DOES EVERY ECONOMIC SYSTEMS NEED TO ADDRESS THESE QUESTIONS?

7. Scarcity – Resources vs. Wants
Needs & Wants
Unlimited
Limited
Resources
SCARCITY
CHOICES (SOCIETY)
WHAT to Produce?
HOW
to Produce It?
WHO
Consumes It?

8. Economic Goals Economic Goals Making the most of resources
Economic efficiency
Freedom from government intervention in decisions on the production and distribution of goods and services
Economic freedom
Assurance that goods and services will be available, payments will be made on time, and a safety net will protect individuals in times of economic disaster
Economic security and predictability
Balanced distribution of wealth
Economic equity
Innovation => economic growth, and economic growth => a higher standards of living
Economic growth and innovation
Societies pursue additional goals, such as environmental protection.
Other goals

9. Four Basic Economic Systems
Traditional Economy
Relies on habit, custom, or ritual to decide what to produce, how to produce it, and who consumes the output of the economy
Market Economy
Economic decisions are made by individuals acting in their self interest, and involve free exchange or trade
Command Economy
The government makes all decisions about the production and consumption of goods & services
Mixed Economy
A mixture of market and government based allocation of resources

10. Theory vs. Reality These are conceptual frameworks
Every economy has all these elements
Describe your morning!

11. Traditional Economy
…relies on habit, custom, or ritual to decide what to produce, how to produce it, and who consumes the output of the economy
Advantages:
Certainty – roles all predetermined
Stability and safety – social net
Disadvantages:
Low standard of living
Little innovation = vulnerable to external shocks
What to produce? just what’s needed to meet basic needs
How to produce? as it was done in the past - tradition
Who consumes it? oneself and one’s family

12. Market Economy
…economic decisions are made by individuals acting in their
self interest, and involve free exchange or trade
Advantages:
Encourages innovation and growth
Tends toward high efficiency
High degree of freedom and choice
Disadvantages:
Unequal distribution of benefits (poverty)
Persona uncertainty
Subject to boom and bust cycles
What to produce? what the market wants and will pay for
How to produce? however it can done at the lowest cost
Who consumes it? whoever has the money

13. Command Economy …the government makes all decisions about the
production and consumption of goods & services
Advantages:
Potential fairness
Safety net – free services (education, health)
Easy to mobilize resources quickly to achieve national or societal goals
Disadvantages:
Relatively low efficiency
Weak incentives for hard work
Little consumer choice / economic freedom
What to produce? what the government decides
How to produce? how the government says
Who consumes it? whoever the government says (ideally fair)

14. Mixed Economy …a mixture of market and government based
allocation of resources
Advantages:
Reasonable innovation and efficiency
Basic economic safety net
Basic services guaranteed for all (fairness)
Disadvantages:
Some wasted or misallocated resources
Potentially slower growth than market system
Less consumer choice
Higher taxes
What to produce? a mix of market and government directed
How to produce? a mix of lowest cost and government plan
Who consumes it? a mix of who has money and who has votes

15. Total Individual Control Total Government Control
Economic Continuum
Total Individual Control
Total Government Control
Government provides public safety, enforcement of contracts and property rights, national defense
Above, plus basic public services, e.g. roads, fire protection, education, science
Above, plus retirement programs, health care, strong employment laws
Above, plus government ownership of key industries, e.g. telecom, energy, airlines, banking, and distributes certain goods, e.g. housing, food, etc.
Above, plus government hands out all jobs, sets all prices, allocates food, owns all industries