Post on 04-Jan-2016
Economic SystemsEconomic Systems
The purpose of The purpose of economicseconomics
Economics seeks to Economics seeks to answer the basic answer the basic question of how to question of how to deal with SCARCITY.deal with SCARCITY.
Law of Scarcity Law of Scarcity
States that society has insufficient productive resources to fulfill all human wants and needs.
Scarcity implies that not all of society's goals can be pursued at the same time; trade-offs are made of one good against others.
Economic SystemsEconomic Systems
An An economic system economic system describes how a describes how a country’s economy is organizedcountry’s economy is organized Because of the problem of Because of the problem of scarcityscarcity, every , every
country needs a system to determine how country needs a system to determine how to use its productive resourcesto use its productive resources Scarcity = not having enough of somethingScarcity = not having enough of something
An economic system must answer 3 An economic system must answer 3 questions…questions…
Economic SystemsEconomic Systems
1.1. WHAT TO PRODUCE? WHAT TO PRODUCE? (What kinds of goods (What kinds of goods and services should be produced?)and services should be produced?)
2.2. HOW TO PRODUCE? HOW TO PRODUCE? (What productive (What productive resources are used to produce goods and resources are used to produce goods and services?)services?)
3.3. FOR WHOM TO PRODUCE? FOR WHOM TO PRODUCE? (Who gets to (Who gets to have the goods and services?have the goods and services?
Three Types of Economic Three Types of Economic Systems:Systems:
1. Traditional Economy1. Traditional Economy
2. Command Economy2. Command Economy
3. Market Economy3. Market Economy
* Most countries are… * Most countries are… Mixed Mixed EconomiesEconomies! (Market + Command)! (Market + Command)
Distribution of Distribution of Public/Private PropertyPublic/Private Property Private property is the right of
persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other forms of property.
Public property refers to assets owned by a state, community or government rather than by individuals or a business entity.
Traditional EconomyTraditional Economy An economic system in which An economic system in which
economic decisions are economic decisions are based on based on customs and beliefscustoms and beliefs
People will make what they always People will make what they always made & will do the same work their made & will do the same work their parents didparents did
Exchange of goods is done through Exchange of goods is done through BarteringBartering: trading without using : trading without using moneymoney
Traditional EconomyTraditional Economy Who decides what to produce?Who decides what to produce?
People People follow their customs and make what follow their customs and make what their ancestors madetheir ancestors made
Who decides how to produce goods & Who decides how to produce goods & services?services? People People grow & make things the same way that grow & make things the same way that
their ancestors didtheir ancestors did Who are the goods & services Who are the goods & services
produced for?produced for? People in the People in the village who need themvillage who need them
Traditional Economy Traditional Economy
Examples:Examples: Villages in Africa and South America Villages in Africa and South America the Inuit tribes in Canadathe Inuit tribes in Canada the caste system in parts of rural Indiathe caste system in parts of rural India the Aborigines in Australiathe Aborigines in Australia
Command SystemCommand System Government makes all economic decisions Government makes all economic decisions
& owns most of the property& owns most of the property Governmental planning groups determine Governmental planning groups determine
such things as the prices of goods/services such things as the prices of goods/services & the wages of workers& the wages of workers
This system has not been very successful & This system has not been very successful & more and more countries are abandoning itmore and more countries are abandoning it
Command EconomyCommand 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
Command SystemCommand System
Countries with Countries with communist governments have communist governments have Command economiesCommand economies
Examples: Examples: There are no truly pure command There are no truly pure command economic systems, but close countries are: economic systems, but close countries are: North Korea, former Soviet Union, CubaNorth Korea, former Soviet Union, Cuba
*Germany and Russia have moved away from *Germany and Russia have moved away from having a Command economy since 1991. Now having a Command economy since 1991. Now they have a Mixed economy.they have a Mixed economy.
Market EconomyMarket Economy An economic system in which An economic system in which
production and distribution production and distribution questions are answered by prices questions are answered by prices and profits (supply and demand)and profits (supply and demand)
Most of the resources are owned by Most of the resources are owned by private citizensprivate citizens
Economic Economic decisions are based on decisions are based on Free EnterpriseFree Enterprise (competition (competition between companies)between companies) Important economic questions are not Important economic questions are not
answered by gov. but by individualsanswered by gov. but by individuals Gov. does not tell a business what goods Gov. does not tell a business what goods
to produce or what price to chargeto produce or what price to charge
Market EconomyMarket Economy
Who decides what to produce? Businesses base decisions on supply and
demand and free enterprise (PRICE) Who decides how to produce goods
and services? Businesses decide how to produce goods
Who are the goods and services produced for? consumers
Market EconomyMarket Economy
There are There are no truly pure Market no truly pure Market economieseconomies, but the United States is , but the United States is close.close.
In a truly free market economy, the In a truly free market economy, the government government would not be involved at allwould not be involved at all There would be There would be no laws to protect workers no laws to protect workers form unfair form unfair
bossesbosses There would be There would be no rulesno rules to make sure that credit cards to make sure that credit cards
were properly protectedwere properly protected
Many societies have chosen to have some rules to Many societies have chosen to have some rules to protect consumers, workers, and businesses protect consumers, workers, and businesses ((MIXEDMIXED)) These rules reduce the freedoms that businesses have, These rules reduce the freedoms that businesses have,
but they also protect the workers and consumersbut they also protect the workers and consumers
Mixed EconomyMixed Economy Market + Command = MixedMarket + Command = Mixed There are no pure command or market There are no pure command or market
economies. economies. To some degree, all modern economies exhibit To some degree, all modern economies exhibit
characteristics of both systems and are often characteristics of both systems and are often referred to as mixed economies. referred to as mixed economies.
Most economies are closer to one type of Most economies are closer to one type of economic system than anothereconomic system than another
Businesses own most resources and Businesses own most resources and determine what and how to produce, but the determine what and how to produce, but the government regulates certain industriesgovernment regulates certain industries
Mixed EconomyMixed Economy
Who decides what to produce?Who decides what to produce? businessesbusinesses
Who decides how to produce goods and Who decides how to produce goods and services?services? Businesses, but the government regulates Businesses, but the government regulates
certain industriescertain industries Who are the goods and services Who are the goods and services
produced for?produced for? consumersconsumers
Mixed EconomiesMixed Economies
Most democratic countries fall in Most democratic countries fall in this categorythis category (there are no truly (there are no truly pure Market or Command pure Market or Command economies).economies). Examples: Examples: Brazil, Mexico, Canada, UK, Brazil, Mexico, Canada, UK,
US, Germany, Russia, Australia, etc.US, Germany, Russia, Australia, etc.
Economy ContinuumEconomy Continuum
Command Market
Cuba Russia Germany USAustralia
UK
Which Economic System Is Which Economic System Is Best?Best?
Market system has proven to be best Market system has proven to be best because it promotes the goals of growth, because it promotes the goals of growth, freedom, & efficiencyfreedom, & efficiency Citizens are free to own their own property Citizens are free to own their own property
and use it in the most efficient and profitable and use it in the most efficient and profitable wayway
Command and Traditional systems Command and Traditional systems sometimes offer more security, but are sometimes offer more security, but are not nearly as strong in efficiency, growth, not nearly as strong in efficiency, growth, freedom, and environmental qualityfreedom, and environmental quality