Economic Systems Capitalism An economic system based on

Economic Systems Capitalism - An economic system based on the “Survival of the fittest”. Socialism – An economic system based on “You get your share no matter what your contribution is”. Communism – An economic system based on “You put in your fair share, you get your fair share”.

Economic Systems • Economic System – organized way in which a society provides for the wants and needs of its people – basically it is the system it uses to answer the three basic economic questions • Three kinds of systems exist – Traditional – Market or Free-Market, Free-Enterprise, Capitalism – Command or Planned (Communism) • Economies really are usually Mixed

Traditional Economies • Characteristics: the allocation of scarce resources and other economic activities are based on ritual, habit, or custom • Examples: many indigenous societies have traditional economies, Inuit, Australia’s Aborigines, central African Mbuti • Advantages: 1) everyone knows which role to play, 2) Stable, predictable, and continuous life, born into a family of hunters = you are a hunter

Traditional Economies • Disadvantages: 1) discourages new ideas 2) Stagnation and a lack of progress 3) leads to a lower standard of living

Command Economies • Characteristics: a central authority makes the major decisions about what, how, and for whom to produce. – It can be headed by a king, a dictator, a president, or a small group. – In a pure command economy, the government makes the major economic decisions – Private property rights are severely limited – Individual freedom is limited – government might tell you what your career is

Command Economies • Examples: Cuba, North Korea (map on next slide) • Advantages: 1) a country can change direction very quickly ex. USSR was able to industrialize rapidly by focusing on the growth of heavy industry. 2) health and public services are available to everyone at little to no cost • Disadvantages: 1) they ignore the basic wants and needs of consumer ex. USSR people stood in long lines to get scarce consumer goods.

Command Economies 2) The system gives people the incentive to fulfill their quota instead of producing good products ex. Parking lot activity 3) The system requires a large decision-making bureaucracy – this slowed decision making and raised the cost of production 4) The system lacks the flexibility to deal with minor day-to-day problems 5) Lacks room for individual initiative 6) Lacks effective incentives to get people to work hard

Market Economies • Characteristics: people make decisions in their own best interests – People have a great deal of freedom – their dollars “vote” in the market – Producers are free to determine how to answer the three basic economic questions – Capitalism – private citizens own the factors of production • Examples: the U. S. Japan, South Korea, Singapore, Australia, most of Europe – the most prosperous countries in the world

Market Economies • Advantages: 1) 2) 3) 4) 5) 6) Individual freedom for everyone Able to adjust to change gradually Lack of government interference Decentralized decision making Incredible variety of goods and services High degree of consumer satisfaction • Disadvantages: 1) Rewards only productive resources – does not provide for people too young, too old, or too sick to work

Market Economies 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 Economies • Characteristics: Most countries have systems that combine elements of all three types • Socialism is a mixed economic and political system in which the government owns an controls some, but not all, of the basic productive resources – government also provides some of the basic needs of its people, such as education and health care • Examples: China = traditional in rural areas, government makes most decisions, but is starting to allow some private ownership. Norway = government owns the petroleum industry and provides social welfare, education, roads etc.

Mixed Economies • Advantages: 1) Provides assistance for people who would be left out 2) Voters can use the democratic process to affect the what, how, and for whom questions 3) The for whom question is addressed more directly • Disadvantages: 1) The cost of providing services to people who would be left out can increase costs for all 2) Some services may be limited 3) Often is less efficient than pure capitalism

Economic and Social Goals 1) Economic Freedom – can choose occupations, producers choose how, what, and for whom 2) Economic Efficiency – do not want to waste any resources 3) Economic Equity – equal pay for equal work etc. 4) Economic Security – protection from losing job or being injured – social security system 5) Full Employment – the economy runs better when everyone has a job – the Employment Act of 1946

Economic and Social Goals 6) Price Stability – inflation (a rise in the general level of prices) can be very harmful – it hurts workers whose wages don’t keep pace, crushes people living on a fixed income, and can discourage business activity – Also in the Employment Act of 1946 7) Economic Growth – it enables more people to have more goods and services – growth must happen if the nation’s population is growing • Trade-Offs must happen when goals conflict ex. unemployment vs. inflation or economic freedom vs. economic equity

American Free Enterprise • Free Enterprise – resources are privately owned, and competition is allowed to flourish with a minimum of government interference – the unhindered use of privately owned resources to earn profits • Characteristics: 1) Economic Freedom – people may choose their jobs, employers, and how to spend their money. Businesses may choose what products to sell and how much to charge for them

American Free Enterprise 2) Voluntary Exchange – buyers and sellers may engage freely and willingly in market transactions 3) Private Property Rights – people may control their possessions as they wish 4) Profit Motive – people and organizations may improve their material well-being by making money 5) Competition – producers and sellers compete with one another to attract consumers, while lowering costs. Consumers compete with one another to obtain the best products at the lowest prices

The Role of the Entrepreneur • The Entrepreneur organizes and manages land, capitalism and labor in order to seek the reward called profit • They take risks to start businesses in hopes of earning profits – they drive the American Free Enterprise system. They create products and jobs

The Role of the Consumer • Consumers determine which products will be produced – consumer sovereignty – role of consumer as ruler of the market when determining the types of goods and services produced – “The customer is always right” • Consumers “vote” with their dollars in the marketplace • New Coke failed horribly

The Role of Government • The power of the government in the economy comes from the people • Roles of the government: 1) Protector – enforces laws against false advertising or unsafe products etc. 2) Provider – provides goods and services – national defense, roads, etc. 3) Regulator – preserves competition and oversees industries to ensure fair practices 4) Consumer – very large consumer of goods and services