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Chapter1 - Economic Systems

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Gayle Young

on 3 February 2014

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Transcript of Chapter1 - Economic Systems

Function of an Economic System
Every society has an economic system to produce and distribute goods and services.
All societies use an economic system to provide for needs and wants of their people.
Depends on the society's goals and values.

Three Key Economic Questions
What goods and services should be produced?
No country can produce every good it wants in the quantity it would like. Why?
How should these goods and services be produced?
Will production decisions be made by individuals or by the government?
Who consumes these goods and services?
Will the government decide? Will price decide?
5 Economic Goals
Economic Freedom
Economic Efficiency
Economic Equity
Economic Security and
Predictability (Stability)
Economic Growth and Innovation
The cornerstone of American society.
Allowing individuals to make economic choices about earning income, owning property, and purchasing goods and services.
Individuals want choice... occupation, entrepreneur
Maximize output of goods and services from the resources available.
Don't waste resources, fewer goods and services can be produced if resources are wasted.
Dividing resources in a way that is considered fair.
Minimum wage
Can't discriminate on the basis of age, sex, race, religion, or disability in employment
Assuring people that goods and services will be available
Providing aid for retirement and in difficult times
Low inflation and unemployment
Social security, unemployment
Encouraging the development of new ideas and skills; helping the economy grow
Hope for a better job, newer car...
an arrangement that allows buyers and sellers to exchange
Why do markets exist?
They exist because no one is self-sufficient.
Specialization makes us more efficient.
Factors of Production are used in the most efficient manner.
Divide labor - have people who are specialized in their field do their tasks
Easier to learn one task then to do them all
Assembly line
Four Economic Systems

Traditional Economic System
The basic economic question of WHAT, HOW, and WHO are answered by doing things the way they have always been done.
India - Caste System
Tribal areas in Africa
U.S. - take over parent's business
Everyone knows which role to play
Little uncertainty of what or how to produce
Stable, predictable, and continuous life
Customs and traditions determine who is provided for
Family and community ties are strong
Individuals generally not free to make decisions on occupation
Discourages new ideas, new technology, and new ways of doing things, leading to stagnation and a lower standard of living
Have few mechanisms in place to deal with disasters such as floods, drought
Strict rules defined by elders
Consumer choices are rare
Methods of production are often inefficient
Command Economic System
or Centrally Planned

The basic economic question of WHAT, HOW, and WHO are answered by the government.
Government Leaders
Central Authority Committee
The government makes all the decisions because they own the factors of production
Can change direction drastically through emphasizing/allocation
Health and public services are available to everyone for little or nor cost
Little uncertainty over choice of career, where to work, or losing job
Basic wants and needs of the consumers are ignored
Lacks effective incentives to get people to work or show inventiveness
Economies tend to be unproductive, not producing a good product
Requires large bureaucracy, which consumes resources and lacks flexibility
Severely limits private property rights
Individual freedoms and initiative are limited
Today: Cuba, North Korea
Former U.S.S.R
China before 1989
Market Economic System
(Free Market, Capitalism)

The basic economic question of WHAT, HOW, and WHO are answered by consumers and business jointly.
Allows people to make decisions in their own best interest.
Buyer and sellers exchange goods and services in a market.
Market economics is based on capitalism.
Capitalism means that the factors of production are privately owned.

Large variety of goods and services
High degree of individual freedom
Adjust gradually to change over time
Small degree of government interference
Decentralized – not concentrated in the hands of a few
High degree of consumer satisfaction
Not everyone is provided for - rewards only productive resources - not too young, too old, or too sick to work
Workers and businesses face uncertainty as a result of competition and change – no guarantee for job
Does not produce enough public goods such as defense, universal education, or health care
Little incentive to engage in unprofitable ventures like caring for the sick.
Hong Kong
Mixed Economic System
Mixed economies are systems that combine traditional and the free market with limited government intervention.
Provides assistance for some people who might otherwise be left out
Government creates laws protecting property rights and enforcing contracts
Governments provide for national defense, roads and highway systems, conservation, environmental protection, education
More services mean higher costs for citizens overall – in the form of taxes
In socialist countries, availability of services may be limited or quality deteriorates over time.
Loss of decision making ability if your business falls under government regulations.
U.S. is a mixed Economic System
Almost all countries in the world have some degree of mixed economic system.
United States, Canada, India, United Kingdom
Degree of Government in Mixed Economies
Mixed economies differ by the degree of government involvement in the economy.

Canada – mixed on the side of free market

China – mixed on the side of command

Allow involvement because not all things are provided for in a free market system.
Hong Kong
North Korea
United States
South Africa
Directed by Command
Directed by Free Market
Ownership of Resources
Basic productive resources are government owned and operated; the rest are privately owned and operated.
Allocation of Resources
Capital for production is obtained through the lure of profits in the market.
Role of Government
Government directs the completion of its economic plans in key industries.
All productive resources are government owned and operated.
Productive resources are privately owned and operated.
Centralized planning directs all resources.
Government plans ways to allocate resources in key industries.
Government makes all economic decisions.
Government may promote competition and provide public goods.
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