1. Economic Systems

2. The 3 Major Production Questions What to produce? How to produce? For whom to produce? We will classify economic systems into categories, based on how each of them attempts to answer these three questions.

3. Traditional Economy The answers to the three major production questions are dictated by ritual, habit, or custom.

7. Examples of Traditional Economies Inuit tribe Some parts of South America Some parts of Africa Aboriginal tribes of Australia Some island societies

8. Traditional Economies Advantages?Disadvantages?

9. Command Economy The answers to the three major production questions are given by some strong central authority (i.e. the government) Public ownership of resources Communism – an economic system in which all factors of production are the property of the state.

10. Examples of Command Economies Cuba

11. Examples of Command Economies North Korea

12. Command Economies StrengthsWeaknesses

13. Market Economy Businesses and individuals act in their own best interest to answer the three major production questions. Private ownership of resources Capitalism – an economic system in which individuals and businesses compete, with a minimum of government interference “Laissez-Faire”

14. Market Economies StrengthsWeaknesses

15. Mixed Economies Mixed-Market Socialism Economies in Transition

16. Total Government Control No Government Control CommunismSocialismMixed-Market Capitalism Little Economic Freedom Total Economic Freedom

17. RankCountryOverallChange 1Hong Kong90.0+0.3 2Singapore87.1-0.2 3Australia82.6+0.4 4Ireland82.2-0.3 5New Zealand82.0+1.2 6United States80.7-0.3 7Canada80.5+0.3 8Denmark80.0+0.4 9Switzerland79.4-0.1 10United Kingdom79.0-0.5 2009 Index of Economic Freedom: The Top 10 http://www.heritage.org/Index/

18. 2014 Index of Economic Freedom:

19. Bottom 7

20. Role Players in the Mixed-Market Economy Consumers Producers Government Consumer Producer Protector Regulator Provider

21. 7 Economic & Social Goals of Capitalism 1.Economic Freedom 2.Economic Equality 3.Economic Security 4.Economic Growth 5.Economic Efficiency 6.Price Stability 7.Full Employment

22. Capitalism Communism

23. Capitalism Communism

24. CharacteristicCapitalismCommunism Primary Economic Goal Basis of Economy Resource Allocation Government Planning Ownership of F.O.P. Motivation Economic Freedom Economic Equality Competition Cooperation / Collectivization Supply & Demand Government Planning Private Property Public Property Profit Motive Patriotism: The Good of Community

25. “From each according to his ability, to each according to his needs!” –Karl Marx »Critique of the Gotha Programme, 1875

26. Communism Communism: How/Why does it rise? How/Why does it fall?

27. Why Doesn’t It Work? Incentive Problem –Average Test Scores Example Coordination Problem In one word, why doesn’t it work? GREED

28. “As for me, I am not a Marxist.” Karl Marx

29. When CAN It Work?

30. Characteristics of Free Enterprise Capitalism Economic Freedom Voluntary Exchange –Consumer Sovereignty: The consumer drives the market – DOLLAR VOTES –“The customer is always right!” Private Property Rights –The Tragedy of the Commons Profit Motive/Self-interest Competition –Markets and Prices –Specialization/Division of Labor

31. Market System Questions What will be produced? –consumer sovereignty –dollar votes How will goods be produced? –technology –resource cost 2-31

32. Market System Questions Who gets the output? –willingness to pay How is change accommodated? –self-interest How is progress promoted? –technological advance –capital accumulation 2-32

33. The Invisible Hand 1776 Wealth of Nations by Adam Smith –Unity of private and social interest Virtues of the market system –Efficiency –Incentives –Freedom 2-33