1. 1 Economic Systems Engineering Economics Lecture 22 27 January 2010  Economic Systems  Production Possibilities Frontier (PPF)

2. 2  Why are economies around the world growing more market oriented?  How much can an economy produce with the resources available?  Can you actually save time by applying economic principles to your family chores?  Why is ‘experience’ a good teacher?  Why is ‘fast food’ so fast? Consider

3. 3 INFINITE WANTS + FINITE RESOURCES = THE NEED TO ECONOMISE

4. 4 Best case scenario: Maximize our satisfaction with our limited resources, i.e. choose how to use our resources to our greatest advantage ECONOMISE ECONOMISE

5. 5 1.LAND – all natural resources 2.LABOUR – human effort involved in production 3.CAPITAL – money, machinery, equipment for manufacturing

6. 6 Three Economic Questions  All economies must answer these three questions: 1. 1. What goods and services will be produced? 2. 2. How will they be produced? 3. 3. For whom will they be produced?

7. 7 ‘Real Economy’ versus ‘Money Economy’ Q: Would the wealth & standard of living of the country increase if the Government printed more money? The real economy is concerned with the amount of Goods & Services available to the population - e.g., shopping centres, public transport, quantity of food, number of hospital beds etc.. Whereas, money has no intrinsic value – it merely enables transactions to take place – it can be exchanged for G&S’s

8. 8 Money Money is a liquid asset (can easily be converted into other assets) The functions of money:  medium of exchange  unit of account  a store of wealth

9. 9 Economic System  All economies face the ‘economic problem’  Society must adopt an economic system in order to allocate their resources  When allocating resources, the society must consider 3 questions:  What is to be produced?  How are the goods to be produced?  For whom?  Society’s answers to these questions will determine which economic system they adopt: Capitalist, Mixed, Socialist or Islamic

10. 10 Economic System  An economic system is the set of mechanisms and institutions that resolves the what, how, and for whom questions.  Some standards used to distinguish among economic systems are:  Who owns the resources?  Allocation of resources?  Incentives and rewards?

11. 11 Market Economy - Capitalism  All resources are privately owned  Economic activity is based on the prices generated in competitive markets  Any income derived from selling resources goes exclusively to each resource owner  Also called capitalism  USA Model

12. 12 Capitalist Economic System  Free enterprise system  Price mechanism - Competition  Privately owned resources  Profit motive  Sovereignty of Dollar

13. 13 Advantages of Capitalist System  Encourages most efficient methods of production by private businesses (profit motive)  Encourages competition in production techniques  Allows economic freedom

14. 14 Problems with Market Economies  Difficulty enforcing property rights  Some people have few resources to sell  No public service motive except for some essential  Inequality in distribution of goods & services  Monopoly lead to unfair practices

15. 15 Centrally Planned Economy - Socialism  All resources government owned  Economy by the central plans of government  Sometimes called Socialist Economy  Use visible central planners  UK Model

16. 16 Problems with Centrally Planned Economies  Consumers get low priority  Little freedom of choice  Central planning can be inefficient  Resources owned by the state are sometimes wasted

17. 17 Mixed Economy  Market economy + Social Economy  Government regulates the private sector in a variety of ways.  China & Pak Model

18. 18 Features of Mixed Economies  Monetary system & legal system  Controlling monopolies  Provision of essential goods & services  Regulating undesirable business practices  Alleviate inequality in society (progressive tax, social welfare)  Attempting to provide stable economy

19. 19 Islamic Economy  Sovereignty of Allah  Circulation and not accumulation  Money is for help to get better reward in the world hereafter – social welfare  Discourages lust, greed and materialism  Discourage wrong means

20. 20 Production Possibilities Frontier (PPF)  PPF model  Shows possible combinations of types of goods that can be produced when available resources are used fully and efficiently

21. 21 Production Possibilities Frontier  A through F are attainable  I represents inefficient use of resources  U represents unattainable combinations

22. 22 Reasons of Shifts in the PPF  Economic Growth – an expansion in the economies ability to produce  Changes in resource availability  Increases in stock of capital goods  Technological change

23. 23 Shifts in the PPF Increase in available resourcesDecrease in available resources

24. 24 Thanks we have finished the course