Alternative Economic Systems

7/30/2019 Alternative Economic Systems

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Alternative Economic Systems

Learning Plan 4


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Alternative Economic Systems

Questions

1. Why does the scarcity problem force all

societies to answer the questions what,how, and for whom?

2. How can economies be classified?

3. What are the characteristics of an

command socialist economy?

4. What are some problems that command

socialist economies face?


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Economic Systems

Economic System is the institutional

means through which resources are used

to satisfy human wants.


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Economic Systems

Unlimited wants/ scarce resources

Rules

Channeling competition

Resolving conflict

Laws

Customs


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Economic Systems

1. Capitalism. An economic system in

which individuals own productive

resources; these individuals can use theresources in whatever manner they

choose, subject to common legal

restrictions. A. Property rights. The right of an owner to

use and to exchange property.


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Economic Systems

Socialism. An economic system in which

the state owns the major share of

productive resources except labor.Socialism also usually involves the

redistribution of income.


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Economic Systems

Communism. An economic system in which

the state has disappeared and in which

individuals contribute to the economyaccording to their productivity and are

given incomes according to their needs.

In pure communism, we would see theabsence of economic class distinctions.

Centrally planned (command) economies.


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Economic Systems

Two classifications

1. Market System. A system in which

individuals own the factors of productionand decide individually how to use them; a

system with decentralized economic

decision making


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Economic Systems

2. Command System. A system in which the

government controls the factors of

production and makes all decisions abouttheir use and about the distribution of

income.


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Economic Systems

No matter what the system, the

fundamental economic problem of scarcity

must be solved. Every economy faces opportunity costs in

making decisions.


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3 Basic Economic Questions

Resource Allocation

The assignment of resource to specific

uses determining what will be produced,how it will be produced, and for whom it will

be produced.


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What, How, And For Whom To

Produce Is The Function of Price What

What is produced is determined by the

dollar votes that we cast for things and bythe dollar costs of producing those things


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Produce Is The Function of Price Whom

For whom to produce is determined by the

price the market creates for resources thatpeople own-things like land, capital, and

our labor services.


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Produce Is The Function of Price How

How goods are produced is determined as

business firms compare the relative pricesof resources-land, labor, capital, and

entrepreneurship

Firms want to develop lowest-costcombination of resources


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Least-cost Combination

The level of input use that produces a given

level of output at minimum cost.


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Market Prices

Market prices communicate crucially

important information:

1. To consumers about product availability.

2. To producers about consumer preferences

3. To individuals above the relative value of

particular kinds of knowledge and skills


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Market Prices

Prices ration resources and goods

1. When something is scarce, the quantity

of is insufficient to allow everyone to haveas much as they like.

2. There must be some method of

determining who gets how much of scarcethings


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Market Prices

Price acts as a message to the market

participants.

The price system is the messenger.

1. The price system delivers a message

about changing market conditions.

2. The price system delivers does not

create the changing market conditions.


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Extreme Economic Systems:

Market Capitalism and CommandSocialism

Market Capitalism In Theory

1. Private property rights exists, arelegal, and are upheld by the judicial

system


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2. Prices are allowed to seek their own

level as determined by the forces of supply

and demand. In this sense, pure capitalismis a price system.


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3. Resources, including human labor, are

free to move in an out of industries and

geographic locations. The movement ofresources follows the lure of profits-higher

expected profits create an incentive for

more resource to go where those profitsmight occur.


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4. Risk takers are rewarded by higher

profits, but those whose risks turn out to be

bad business decisions suffer theconsequences directly in terms of reduced

wealth.


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5. Decisions about what and how much

should be produced, how it should be

produced and for whom it should beproduced are left to the market. In a pure

market capitalist system, all decisions are

decentralized and made by individuals in aprocess of spontaneous coordination

throughout the economy.


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Laissez Faire

An economic system in which the

government minimizes its activity within

the economy.


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Three of Attributes of Market

Capitalism Prices

Profits

Private Property


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Government Role in Capitalist

System Limited to certain goods

Legal framework


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Command Socialism in Theory

Command Socialism. An economic system

in which there is virtually no private

property and the state owns virtually all thefactors of production. Decisions about

what and how much, by whom and for whom

are decided by command from a centralauthority.


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1. Most of the major factors of productions

are owned by the state. Private property

rights are strictly limited to small tools thatan individual needs for an occupation.

Land, factories, and major machinery are

never privately owned. 2. Most prices are set by the state rather

than by the forces of supply and demand.


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3. The movement of resources, including

labor, is strictly controlled. Resources

typically move only when dictated by acentralized planning authority.

4. Economic decisions about what and how

much, how, and for whom are all made bythe state through its central planning

agencies and other administrative units.


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5. Little individual risk taking is allowed;

rather, risk taking in the form of new

ventures is undertaken by the state. Allcitizens benefit from successful risk

taking, and all citizens pay for

unsuccessful risk taking, but not directlythrough immediate reduction in individual

income and wealth.


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6. Taxation is often used to redistribute

income.


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Economic Planning

Does economic planning occur in a

centralized command economy and not in a

decentralized market economy?


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Incentive Structure

The motivational rewards and costs that

individuals face in any given situation.

Each economic system has its ownincentive structure.


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Mixed Economies

An economic system in which decisions

about how resources should be used are

make partly by the private sector and partlyby the government, or the public sector.

What is the future of mixed economies?


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China: Past, Present, and Future


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Movement Toward The Market In

Russia


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Changes In Other Parts Of The

World

Alternative Economic Systems

Documents

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