1. CONTEMPORARY ECONOMICS
6/2/2018
Economic Systems
LESSON 2.1

2. Comparative Economic Systems
Do Now: Answer the following question to the best of your ability:
What problem/issue determines how a country needs a system to determine how to use its productive resources?

3. Human wants are unlimited,
but resources are not.

4. Economic System
An economic system, is the way a nation makes economic choices about how the nation will use its resources to produce and distribute goods and services.

5. An economic system describes how a country’s economy is organized
Because of the problem of scarcity, every country needs a system to determine how to use its productive resources
Scarcity = not having enough of something
Given scarce resources, an Economic System must answer the three basic economic questions

6. Economic Systems
WHAT TO PRODUCE? (What kinds of goods and services should be produced?)
HOW TO PRODUCE? (What productive resources are used to produce goods and services?)
FOR WHOM TO PRODUCE? (Who gets to have the goods and services?

7. Standards Used to Distinguish Economic Systems
Some standards used to distinguish among economic systems are:
Who owns the resources?
What decision-making process is used to allocate resources and products?
What types of incentives guide economic decision makers?

8. Three Economic Systems
CONTEMPORARY ECONOMICS
6/2/2018
Three Economic Systems
Traditional Economy
Command Economy
Market Economy
LESSON 2.1

9. Types of Economic Systems
Traditional System
Command (controlled) System
Market (capitalist)
Mixed System

10. Traditional Economy
An economic system in which economic decisions are based on customs and beliefs
People will make what they always made & will do the same work their parents did
Exchange of goods is done through Bartering: trading without using money

11. Traditional Economy Who decides what to produce?
People follow their customs and make what their ancestors made
Who decides how to produce goods & services?
People grow & make things the same way that their ancestors did
Who are the goods & services produced for?
People in the village who need them

12. Traditional Economy Examples: Villages in Africa and South America
the Inuit tribes in Canada
the caste system in parts of rural India
the Aborigines in Australia

13. Traditional Economic System-
I give you bone for that plastic club!
Me give you bone for Audi 500- me drive fast past you in mud!

14. Traditional System
Traditional economy – system in which economic decisions are based on customs and beliefs that have been handed down from generation to generation
Trades and work learned from parents
Know what is expected of you
Change discouraged or punished
Production inefficient and choice of goods is rare
Examples – Eskimos, Aborigines & Amish?

15. Traditional Economic System: Ritual, Habit, and Custom
The basic economic questions are answered: by doing things the way they have always been done.

16. Advantages
Sets forth certain economic roles for all members of the community
Stable, predictable, and continuous life
Revolves around family
Communities stay relatively close and small

17. Disadvantages
Discourages new ideas, new technology, and new ways of doing things
Stagnation and lack of progress
Lower standard of living – lack modern conveniences
Have few mechanisms in place to deal with disasters such as floods, drought

18. Traditional System
Traditional economy – system in which economic decisions are based on customs and beliefs that have been handed down from generation to generation
Trades and work learned from parents
Know what is expected of you
Change discouraged or punished
Production inefficient and choice of goods is rare
Examples – Eskimos, Aborigines & Amish?

19. Traditional Economy
In a traditional economy, goods and services are produced by the family for their personal consumption. A traditional economy is shaped largely by custom or religion.

20. Traditional Economy
In a traditional economy, resources are allocated according to long-lived practices from the past. There is little surplus (something extra) and little trade (or exchange of goods).

21. Traditional Economy
In a traditional economy, there is only a limited need for markets (places to buy and sell goods and services).

22. Traditional Economy
A traditional economy is the type of economy found in less developed nations, usually in rural areas.

23. Command Economy
In a command economy, all resources are collectively owned and directed by the government.
In a command economy, the government decides what and how much to produce.

24. In a command economy, the government answers the three basic economic questions:
1. What? A dictator or a central planning committee decides what products are needed.
2. How? Since the government owns all means of production in a command economy, it decides how goods and services will be produced.
3. For whom? The government decides who will get what is produced in a command economy.

25. Command Economy
In a command economy, the government decides where to locate economic activities.

26. Command Economy
In a command economy, the government decides what prices to charge for goods, including agricultural goods and services.

27. Command Economy
In a command economy, economic decisions are often made to further the goals of the government.

28. Command Economy
In a command economy, production costs (how much it costs to make an item), are not reflected in the cost of the item.
For example, in a command economy it might cost $2.00 to produce a loaf of bread, but the price might be set at $1.00 in order to ensure that customers are able to afford adequate food.

29. Command Economy
In a command economy, the price might be set higher than the production costs.
For example, in a command economy it might cost $5, to produce a car, but the price might be set at $10, in order to ensure that only the wealthy can buy it.

30. Command System
Government makes all economic decisions & owns most of the property
Governmental planning groups determine such things as the prices of goods/services & the wages of workers
This system has not been very successful & more and more countries are abandoning it

31. Command Economy Who decides what to produce?
Government makes all economic decisions
Who decides how to produce goods and services?
Government decides how to make goods/services
Who are the goods and services produced for?
Whoever the government decides to give them to

32. Command System
Countries with communist governments have Command economies
Examples: There are no truly pure command economic systems, but close countries are: North Korea, former Soviet Union, Cuba
*Germany and Russia have moved away from having a Command economy since Now they have a Mixed economy.

33. Command System
Command economy – system in which the government controls the factors of production and makes all decisions about their use
Government decides what to produce & how it will be distributed
Government guides people into certain jobs
Lack of incentive to work hard, few choices, limited efficiency or inventiveness
North Korea & China (changing)

34. Command Economy
Critics of market economies claimed that capitalism was a form of “class warfare.” They claimed that capitalism/ market economies resulted in a few people ruling over the masses. In order to end capitalism/ market economies critics claimed that a revolution was needed to redistribute goods equally. This revolution came to be known as communism and its economy was known as a command economy. In a command economy the government controls all aspects of the economy.

35. Command Economy- Typically begin with revolutions.

36. Karl Marx was the founder of the communist/ command economy ideology
Karl Marx was the founder of the communist/ command economy ideology. He claimed that as long as there existed a business owning class oppression would continue.

37. Traits of a Command Economy
The government controls all aspects of the economy
Private property is illegal
Supply and demand are determined by the government, not by consumers and producers.
Everyone is paid equally no matter what job they do.
Industry and businesses are owned and controlled by the government, not private individuals.

38. 15. Criticism of Command Economies
Command economies are inefficient and reward unproductive workers. Critics claim that since workers are awarded the same amount of money for doing every job workers aren’t productive.
Command economies result in shadow/ illegal markets. Because the government controls the distribution of goods, rather than consumers and producers individuals begin to sell things illegally.
Command economies cease to stay competitive in the world because competition and entrepreneurship is discouraged.

39. Examples of a Command Economy- In North Korea the former dictator Kim Il Sung controlled the economy with an iron hand and had statues of himself built to show his people who was in charge of the government and the economy.

40. Command or Centrally Planned Economic System
Basic economic questions of what, how and for whom to produce are answered: by a central planning authority.

41. Advantages Central authority is in command of the economy
Capable of dramatic change in a short time
Little uncertainty over choice of career, where to work, or losing job
Many basic education, public health, and other public services available at little or no cost

42. Disadvantages Does not meet wants and needs of consumers
Lacks effective incentives to get people to work
Requires large bureaucracy, which consumes resources
New and different ideas discouraged, no room for individuality

43. Problems of a Centrally Planned Economy
Centrally planned economies face problems of poor-quality goods, shortages, and diminishing production.

44. (free enterprise, capitalism)
Market Economy
(free enterprise, capitalism)
Individual producers must figure out how to plan, organize, and coordinate the production of products and services.
In a market economy, resources are allocated through individual decision making.

45. Market System
Market – freely chosen activity between buyers and sellers of goods and services
Circular flow of economic activity – economic model that pictures income as flowing continuously between businesses and consumers
Advantages – free to choose career and how to spend $, own private property, take risks, & many goods for purchase
Disadvantages – How to provide for elderly, young & sick

46. Market Economy (free enterprise, capitalism)
In a free-market country, people can own their own businesses and property. People can also buy services for private use, such as healthcare.
(But most capitalist governments also provide their own education, health and welfare services. )

47. Market Economy (free enterprise, capitalism)
In a market economy, prices act as signals of scarcity. When the price of something is high, that means it's more scarce. Demand for it is high relative to the supply.

48. Market Economy (free enterprise, capitalism)
When the price of something is low, then it's less scarce. By observing prices, consumers and producers can choose their behavior to respond to scarcity.

49. Market Economy (free enterprise, capitalism)
High prices encourage producers to switch from more scarce to less scarce resources, and they encourage consumers to switch from products and services that require more scarce resources to products and services that require fewer scarce resources.

50. Characteristics of the American Economy
Freedom of choice – can choose to produce or not produce or to buy or not to buy
6 Characteristics of a pure market system
1. Little or no government control
2. Freedom of enterprise
3. Freedom of choice
4. Private property
5. Profit incentive
6. Competition

51. Characteristics of the American Economy
Limited role of government
Adam Smith – founder of modern economics - Wealth of Nations – people will use resources efficiently to achieve the maximum good for society
Capitalism – economic system in which private individuals own the factors of production & decide how to use them within legislated limits
Laissez-faire – pure capitalism – economic system in which the government minimizes its interference with the economy
Government has increased its role since the 1880s

52. Characteristics of the American Economy
Freedom of enterprise
Free enterprise system – economic system in which individuals own the factors of production and decide how to use them within legal limits; same as capitalism
Regulations – zoning, child labor, pollution & taxes – examples
May make money or may lose money
Freedom of choice
Buyers, not sellers, make decisions about what is to be produced
Government influences the market to protect consumers – safety standards & price controls

53. Characteristics of the American Economy
Profit Incentive
Profit – money left after all the costs of production have been paid – wages, bills & taxes
Profit incentive – desire to make money that motivates people to produce and sell goods and services

54. Characteristics of the American Economy
Private Property
Private property – whatever is owned by individuals rather than by government
Constitution guarantees an owner’s right to private property and its use (eminent domain)
Competition
Competition – rivalry among producers and sellers of similar goods and services to win more business
Leads to lower prices, better quality and an efficient use of resources
Low barriers to entry are needed

55. The Goals of the Nation Goals of free enterprise in the U.S.
Economic freedom – allows members of society to make choices and possibly fail
Economic efficiency – wise use of available resources so that costs do not exceed benefits
Economic equity – attempt to balance an economic policy so that everyone benefits fairly – (equal pay, hiring practices & disabled)

56. The Goals of the Nation
Economic security – protection against accidents, natural disasters, bank failures etc.
Economic stability – reduce extreme ups & downs in standard of living
Standard of living – the material well-being of an individual, group, or nation measured by how well their necessities and luxuries are satisfied
Economic growth – expansion of the economy to produce more goods, jobs and wealth
Trade-Offs among goals – limits on what you can do with resources due to scarcity (Social Security)

57. Mixed System
Mixed economy – system combining characteristics of more than one type of economy
Most countries have a mixed economy
Most individuals make decisions but are regulated to various extents by the government

58. Mixed System
Mixed economy – system combining characteristics of more than one type of economy
Most countries have a mixed economy
Most individuals make decisions but are regulated to various extents by the government

59. 16. Mixed Economy
Mixed economies exist somewhere between command and market economies. In a mixed economy the government tends to own major industries like utilities, health care and major manufacturing industries; however, individuals own most small businesses. Mixed economies tend to tax their citizens more than market economies, but less than command economies.

60. Traits of a Mixed Economy
The government controls large industries, while private individuals control small businesses.
Citizens are taxed heavily to provide all citizens a social safety net such as welfare, free university tuition and free health care.
Property is controlled by both the government and private individuals.
Workers tend to be somewhat less productive than those in market economies, but less product then those in command economies.
Consumers generally have a wide variety choices.

61. President Franklin Roosevelt introduced the principles of a mixed economy to the US by expanding the government, providing welfare and establishing Social Security for the elderly.

62. 18. Examples of a Mixed Economy
In France health care is free, university costs very little if you get in (many do not) and taxes are high. However, there are also private industries based out of France like Air France and Puegot.
In United Kingdom health care is free, university is cheap, but citizens can purchase private health insurance and attend private universities if they choose.
In the United States the federal government owns much land in the West and private ranchers are allowed to graze their cattle on that land.

63. 19. Criticism of Mixed Economies
Critics of mixed economies claim that they often result in unproductive workers because there is not as much incentive to work hard as there is in a market economy. As a result mixed economies often suffer from higher unemployment rates and lack the same number of entrepreneurs as market economies.
Mixed economies often must raise taxes in order to sustain all of the social services such as welfare, free health care, low cost university education and pension systems for the elderly which can lead to a stagnant economy.
In essence, critics claim that mixed economies enable irresponsible behavior.

64. 16. Mixed Economy
Mixed economies exist somewhere between command and market economies. In a mixed economy the government tends to own major industries like utilities, health care and major manufacturing industries; however, individuals own most small businesses. Mixed economies tend to tax their citizens more than market economies, but less than command economies.

65. 6-7. Market Economy
As long ago as ancient Egypt humans began to use forms of money to trade for goods and with the free trade of goods arose what is now known as the market economic system.
In a market economy producers make goods based on the amount demand they perceive to exist among consumers. Consumers in turn pay for items based on their supply. For instance, gold is greatly demanded by people across the world, but its supply is limited. Therefore, gold is expensive.

66. Resources, also called factors of production, are all the things used in producing goods and services.
The basic resources available to all societies are:
Natural(or Land)
Human (or Labor)
Capital