Economic Systems and Decision Making Chapter 2 Three

Economic Systems and Decision Making Chapter 2

Three Basic Questions? ? ? • Every society must answer three basic question. Who or What Determines: 1. What gets produced? 2. How things get produced? 3. For whom to produce for?

Different Types of Economies Systems • We have three different types of economic systems. 1. Market 2. Traditional 3. Command

What is a Traditional Economy? • Definition- economic system in which resources are given by inheritance. • This economy has a strong social network based on older methods and tools. • Examples: Ethiopia, Somalia, New Guinea

Traditional Economies Three Basic Questions • In this type of economy, the three basic questions are settled by traditions, customs, and beliefs. • This is the basis for deciding what gets produced, how things are produced, and for whom they are produced for.

Advantages of Traditional Economies 1. Sets forth certain economic roles for all members of the community 2. Stable, predictable and continuous life

Disadvantages of Traditional Economies 1. Discourages new ideas and new ways of thinking 2. Lower standard of living 3. Stagnation and a lack of progress

Command Economies Three Basic Questions • In a command economy, the three basic questions are settled by economic planners from the central government. • This system has not been very successful & more and more countries are abandoning it.

What is a Command Economy? • Definition- an economy in which the government manages the economy. • Examples: Cuba, North Korea, Iran, China

Advantages of Command Economies 1. Capable of dramatic change in a short period of time 2. Many basic education, health and other public services available at little of no cost

Disadvantages of Command Economies 1. Does not meet wants and needs of consumer 2. Lacks effective incentives to get people to work

Disadvantages of Command Economies (cont) § Requires large bureaucracy, which consumes resources § Has little flexibility to deal with day to day changes § Lacks room for individuality

Market Economies Three Basic Questions • The producers and consumers in a market place are responsible for deciding what gets produced, how things are produced, and for whom they are produced for.

What is a Market Economy? • Definition- economic system in which the prices of goods and services are determined by supply and demand. • This can also be referred to as a Free Market Economy. • Examples: United States, Japan, France, and England.

Advantages of Market Economies 1. Can adjust to change easily. 2. Provides a variety of goods and services. 3. High degrees of consumer satisfaction

Advantages of Market Economies (cont) § Individual freedom § Lack of government interference § Decentralized decision making

Disadvantages of Market Economies 1. Rewards only productive resources; does not provide for people too young, too old, or too sick to work 2. Does not produce enough public goods such as defense, universal education, or health care 3. Workers and businesses face uncertainty as a result of competition and change

Mixed Economy Mixed economies exist somewhere between command market economies. In a mixed economy the government tends to own major industries like utilities, health care and major manufacturing industries; however, individuals own most small businesses. Mixed economies tend to tax their citizens more than market economies, but less than command economies.

Traits of a Mixed Economy § Most countries have a Mixed Economy. However, a Mixed Economy is not an economic system but rather a blending of two different types of systems. § The government controls large industries, while private individuals control small businesses. § Citizens are taxed heavily to provide all citizens a social safety net such as welfare, free university tuition and free health care. § Property is controlled by both the government and private individuals. § Workers tend to be somewhat less productive than those in market economies, but less product then those in command economies. § Consumers generally have a wide variety choices.

Examples of a Mixed Economy § In France health care is free, university costs very little if you get in (many do not) and taxes are high. However, there also private industries based out of France like Air France and Puegot. § In United Kingdom health care is free, university is cheap, but citizens can purchase private health insurance and attend private universities if they choose. § The United States is not totally a market economy. It is a mixed economy. § Example 1: The economy of the United States is based on private enterprise. However, some industries (for example, power companies and railroads in some areas) are under collective ownership. §

Criticism of Mixed Economies § Critics of mixed economies claim that they often result in unproductive workers because there is not as much incentive to work hard as there is in a market economy. As a result mixed economies often suffer from higher unemployment rates and lack the same number of entrepreneurs as market economies. § Mixed economies often must raise taxes in order to sustain all of the social services such as welfare, free health care, low cost university education and pension systems for the elderly which can lead to a stagnant economy. § In essence, critics claim that mixed economies enable irresponsible behavior.

Which economic system is best? § The market system has proven to be best because it promotes the goals of growth, freedom, & efficiency. – Citizens are free to own their own property and use it in the most efficient and profitable way. § Command traditional systems sometimes offer more security but are not nearly as strong in efficiency, growth, freedom, and environmental quality.

Global Transition to Capitalism • The transition of communist and socialist economic systems to capitalism has been the dominant economic trend of our lifetime. • Privatization is necessary for the conversion of stateowned property to private ownership. • The ruling party in a communist or socialist economy fears the loss of political power during a transition to capitalism. • Citizens have to learn to make their own decisions, take initiative, interpret prices, and fend for themselves in free markets. • Many countries underestimate the costs of converting to capitalism.

Global Transition to Capitalism (cont) § In Russia, the decades-long transition to capitalism has resulted in the current market-based economy, with the exception of government-controlled energy, natural resource, and defense-related industries. § After the failure of the Great Leap Forward, China was influenced by successful market economies in Asia and today is undergoing some privatization and other capitalistic endeavors. § In Latin America, socialism still exists in Venezuela and Argentina, but Chile has made the transition to capitalism. § After the Soviet Union collapsed, many Eastern European countries transitioned to capitalism, including Poland, Hungary, the Czech Republic, and Slovakia.

Global Transition to Capitalism (cont) • Compared to the U. S. government, the Japanese government is much more involved in the day-to-day activities of the private sector. • By opening its markets to world trade, South Korea has progressed from one of the poorest countries in Asia in the mid-1950 s to a leading producer of electronics and automobiles today. • The government in Singapore has focused on a few select industries, pouring money and resources into pharmaceuticals, medical technology, and financial and high-tech industries. • Taiwan has always depended on economic planning and was one of the early economic powers in Asia, but its centralized planning may hamper future economic growth.

Group Project § Pretend you live in either a Free-Market, Command, or Mixed Economy and choose ONE of the following: – Write a one page “letter home” to a family member describing the economy OR… – Draw a detailed, color cartoon depicting what the economy would “look like”. Please include a brief description of what you drew