Chapter 2 Economic Systems Answering the 3 Basic
Chapter 2 Economic Systems
Answering the 3 Basic Economic Questions Every economy is trying to find the “best” way to distribute scarce resources
Answering the 3 Basic Economic Questions What goods and services will the economy produce? How should these goods and services be produced? Who is going to consume these goods and services?
Kinds of Economic Systems Market Capitalism (a. k. a. Free Market, Free Enterprise) Traditional Market Democratic Socialism (a. k. a. Socialism) Authoritarian Socialism (a. k. a. Communism)
Market Capitalism Individuals own resources and means of production Basically free from government control Adam Smith
Market Capitalism Goal: to motivate people through economic reward People keep the profits from their hard work Adam Smith
Market Capitalism Characteristics n Private Property n Freedom of Choice n Self-Interest n Profit Motive n Supply and Demand n Competition n Limited Government Adam Smith
Market Capitalism Examples : U. S. , Australia, South Africa, Chile Political System : Democracy Adam Smith
Traditional Economy does things as it always has
Traditional Goal: to maintain the same tradition Methods: resist new technologies
Traditional Examples: the Amish in the U. S. , tribes living within developed countries Political System: Tribal Organization
Market Democratic Socialism – term implying redistributing money from the rich to the poor Government owns major means of production (ex. Transportation, Steel, Oil, etc. )
Market Democratic Socialism Goal: Equal distribution of income Methods High Taxes n Benefits paid to low income individuals n
Market Democratic Socialism Examples: Norway, Mexico, Canada Political System: Socialistic Democracy
Authoritarian Socialism (Communism) Government owns all property Total government control of the economy Karl Marx
Authoritarian Socialism (Communism) Goals: equal distribution of income with no social classes Karl Marx
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Authoritarian Socialism (Communism) Methods Working class revolts against the rich owners n One political party controls all government planning n Karl Marx
Authoritarian Socialism (Communism) Characteristics Public Ownership n Centralized Decision Making n Economic Planning n Allocation by Command n Karl Marx
Authoritarian Socialism (Communism) Examples: Old Soviet Union, Cuba, North Korea Political System: Totalitarian Communism Karl Marx
Authoritarian Socialism (Communism) Key Terms from Communist Manifesto n Proletariat – the average worker who (according to Marx) is exploited by capitalism Karl Marx
Authoritarian Socialism (Communism) Key Terms from Communist Manifesto n Bourgeoisie – the rich, ruling class that uses the proletariat to make money Karl Marx
Free Market vs. Central Planning Free Market Advantages n Self-Regulating – produces what is needed and wanted with no government interference Free Market Disadvantages
Free Market vs. Central Planning Free Market Advantages n This self regulating is a result of people acting on selfinterest and incentives Free Market Disadvantages
Free Market vs. Central Planning Free Market Advantages n Competition holds prices to the lowest levels while spurring new invention Free Market Disadvantages
Free Market vs. Central Planning Free Market Advantages n Consumer Sovereignty – people are free to buy what they want Free Market Disadvantages
Free Market vs. Central Planning Free Market Advantages n Encourages a very high degree of economic growth Free Market Disadvantages
Free Market vs. Central Planning Free Market Advantages Free Market Disadvantages n Economic equity and security do not occur in a purely free market
Free Market vs. Central Planning Free Market Advantages Free Market Disadvantages n Market has no incentive to build “public” goods like roads or libraries
Free Market vs. Central Planning Free Market Advantages Free Market Disadvantages n n Spillover costs (negative externalities) – some problems created that effect people who didn’t cause them Ex. - Pollution
Mixed Economies Attempt to get the best out of free market and central planning Government takes action to protect consumers when it feels it is necessary
For Example, in the U. S. : FDA screens food and drug items to ensure their safety Government breaks up harmful monopolies under the Sherman Anti -Trust Act Government provides welfare benefits to people who cannot find a job
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