1. Economic Systems

5. What is Economics? The study of how to distribute limited resources
the study of how people choose to use scarce resources to satisfy their wants.

6. Economic System
The organization of an economy, which represents a country’s distinct set of social custom, political institutions, and economic practices

7. Economic System
All societies must deal with the problem of scarcity. They must make choices about resource allocation because their resources are limited and they must strive to use their resources as efficiently as possible
There are 3 basic economic questions that must be answered by all societies

8. 3 Basic Economic Questions That Any Society Must Answer
What to produce
The point we choose on what production possibilities curve determines what mix of output gets produced
How to produce
Someone must decide which production methods and technologies to use
For whom to produce
Determine whose wants and needs will be satisfied and who must go without

9. Economic Models We use models to help understand economic behaviour
Economic Models = laws, principles, or theories that generalize/simplify economic reality
Economic resources: Canadian Economy has millions of separate transactions made each day. Trying ot keep track of every sale and purchase for the purpose of understanding economic acvitity would be impossible.. Instead we use and build abstractions of reality that allow us to see the basic workings of the eoconomy (forest vs trees)

10. Economic Models Cause and Effect Inverse and Direct Relationships
2 or more variables
Independent variable vs dependent variable
Ie: price of cell phones vs # of cell phones purchased
Inverse and Direct Relationships
Inverse: one variable increase while the other decrease
Direct: one variable increases, the other will increase
What is a an example?

12. Take a 5 min break!

13. 4 main economic systems
Traditional
Market
Command
Mixed

14. Market economy (capitalism)
An economic system based on private ownership
Economic decisions are answered largely by the market (the buyers and sellers’ decisions in the marketplace)
Individuals are free to pursue their own self-interest
The government seldom intervenes
-Households use incomes earned from their ECONOMIC resources by saving some and spending the rest on consumer products
The governemetn performs only the political functions of upholding the legal system and maintaining public security

15. Market Economy
Is consumer-centered and innovative but creates inequality and instability
Profit acts as the incentive for production
A lot of competition
Consumers help sellers decide what to produce for those who are willing and able to pay for these products
Resources flow to those industries producing profitable products
Based on supply and demand

16. Command Economy (socialism/ communism)
Opposite of Market Economy
All productive property, natural resources and capital are in the hands of the government
Central planners decide on what should be produced, how production should be carried out and how the output should be distributed
Command Economy is when the gov’t has CENTRAL planning GOVT

17. In a market economy, decisions made by households about how much to consume and how much to save determines the split between consumer and capital products… in command economy, central planners determine the split based on their judgment of the future needs of the entire economy

19. Benefits of Command Economy
Income Distribution
Can choose to distribute income among its citizens
Economic Growth
Central planners can focus on promoting rate of economic growth
How?
Devoting more resources to capital goods vs market economy
This strategy can be effective when an economy is first building a manfac sector (machines)

20. Drawbacks of Command Economy
Planning Difficulties
Incorrect estimates of future conditions
May lead to overproduction/underproduction of items
Obscures the need for improvement
-Have serious drawbacks relating to planning, efficiency and individual freedom
- Because of these deficiencies, pure command economies are almost as rare as pure market economies; the cloest approx in contemporary times is north korea

21. 2. Inefficiencies 3. Lack of Freedom
Gov’t ownership of productive property can lead to waste and inefficiency
Since command economies cannot depends on the lure of profit to promote the efficient use of resources
Without markets to control individual self-interest, corruption of gov’t officials is a problem
3. Lack of Freedom
Putting so much power into the hands of gov’t stifles individual freedom

23. Reminder

24. Try this Q

26. Please continue working on the worksheet from last day

27. Traditional Economy
An economic system in which economic decisions are made on the basis of custom and tradition
The way outputs are distributed remain the same from generation to generation
Resources are allocated by inheritance
Focuses on non-economic concerns and have tight social constraints.

28. Traditional Economy
The level of technology is low and pace of life is generally slow
Generally self-sufficient; everyone is given a role and each contributes to the community
Can be found in places in South America, Africa and rural places in Asia
Traditional Economy is one in which economic decisions depend on custom, such as a traditional edivision of work b/w women and men.
For ex, farmers in the remote country of Nepal still use traditional methods that have existed for generations. Sine the yare based on tight social constraints, traditional economies are often resistant to change.
However, the long-term outlook for these economie seems clear: they are increasingly being broken down by expanding consumer want and the inability of traditional production methods to meet these wants.
Supporters of traditional economies suggest that they offer the advantage of stability and can be viewed as beneficial because they emphasize the spiritual and cultural aspects of life.

29. Supporters of traditional economies suggest that they offer the advantage of stability
Emphasize the spiritual and cultural aspects of life
Critics: widespread poverty and social restrictions restrain human potential
People must follow the “way of life” vs having the freedom to make their own economic choices
Cricket seller selling cricket cages

30. What is Mixed Economy?

31. Mixed Economy
It is only in theory that a country is purely a market or a command economy because each system has serious flaws
Most economies are a mix of market and command systems

32. Mixed Economy
An economic system that combines aspects of a market economy and a command economy
Production decisions are made both in private markets and by the government
Countries with a mixed economy include Iceland, Sweden, France, the United Kingdom, the United States, Russia and China. These countries have a mix of government spending and free-market systems based on the share of government spending as a percentage of gross domestic product.

33. Range of Economic Systems

34. Index of Economic Freedom

35. Economic Goals There are seven major economic goals:
economic efficiency
income equity
price stability
full employment
viable balance of payments
economic growth
environmental sustainability

36. Complementary and Conflicting Economic Goals
Economic goals may be complementary.
An example is the relationship between full employment and economic growth.
Economic goals may be conflicting.
An example is the relationship between price stability and economic growth.
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.

37. Economic Goals Economic Efficiency
- getting the highest benefit from an economy’s scarce resource

38. Economic Goals
2. Income Equity - a country’s output is distributed fairly

39. Economic Goals
3. Price Stability - maintaining a general level of prices for goods

40. Do PPC Assignment

41. Economic Goals
4. Full Employment - increase employment rate to fully utilize the country’s human resources

42. Economic Goals
5. Viable Balance of Payments - ensure a balance between exports and imports

43. Economic Goals
6. Economic Growth - Economic growth will lead to an outward shift in the production possibilities curve, leading to higher standard of living

44. Economic Goals
7. Environmental Sustainability - the quality of the physical environment should be sustained