1. Economic Systems
Unit 1

2. Economic Systems
How the government or society will allocate its scarce resources
How the government or society will answer the three fundamental questions of economics:
WHAT G&S should we produce?
HOW we should produce G&S?
FOR WHOM are we producing G&S?

3. Economic Systems Traditional Economy Command Economy
Communist or Centrally Planned Economy
Market Economy
Capitalism or Free Market Economy
Mixed Economy

4. Traditional Economy
Allocation of scarce resources is based on ritual, habit, custom
Individuals have little say over role in society & economy
Tend to be more family- centered
Small-knit communities & tribes

5. Traditional Economy Pros:
Everyone knows how to figure out WHAT to produce, HOW to produce, and FOR WHOM to produce
Cons:
Hard to come up with new ideas and G&S
Strict rules against breaking tradition
Lower standard of living

6. Command Economy
“Let the ruling classes tremble at a Communist revolution. The proletarians have nothing to lose but their chains. They have a world to win. Working men of all countries, unite!” Karl Marx, Communist Manifesto

7. Command Economy The GOVERNMENT owns all resources
The GOVERNMENT answers the three fundamental economic questions
People don’t need to worry about making profits
Examples: Cuba, China, N. Korea, former USSR

8. Command Economy Pros: Everyone has a job Equal incomes/pay
Free healthcare
Government won’t go out of business

9. Wrote Communist Manifesto
Command Economy
Karl Marx:
Wrote Communist Manifesto
Doesn’t it sound perfect if everyone gets equal pay, has a job, and doesn’t have to worry about profit since the government is in charge?

10. Command Economy NO Profit means Incentives Bartok the Bat:
Appeared in Anastasia, the VERY historically inaccurate movie supposedly about the aftermath of the Russian Revolution.

11. Command Economy Cons: Government in charge could be corrupt
Little individual freedom
No incentives to make better G&S
No incentives to work harder
No competition

12. Market Economy
“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”
-Adam Smith, Wealth of Nations

13. Market Economy Individuals in the Market own resources
The Market (consumers & producers) answer the three fundamental economic questions
Market Economy is driven by:
Competition
Profit Incentives
Self-Interest

14. Market Economy Laissez-Faire: Hands Off!
Belief that the economy will function best without government intervention
An invisible hand guides the Market to make best decisions

15. Wrote Wealth of Nations
Market Economy
Adam Smith:
Wrote Wealth of Nations
No government involvement + self-interest + competition + invisible hand = Good for Economy

16. Market Economy Producers/Sellers *Profit Maximizers* Want to:
1) Produce G&S as cheaply/efficiently as possible
2) Produce G&S consumers want to buy
3) Sell G&S for high, but reasonable prices
Consumers/Buyers
*Cost Minimizers*
Want to:
1) Buy G&S as cheaply as possible
2) Buy the best G&S they can afford
3) Be willing to pay a reasonable price for G&S

17. Market Economy Pros: Lots of individual freedoms
High customer satisfaction
Lots of varied G&S
Cons:
Lack of public aid and services
Have to worry about market failures

18. Mixed Economy
Combination of both Market and Command Economy