Types of Economic Systems Economic Systems how a

Types of Economic Systems • Economic Systems- how a group or nation organizes itself for production. • There are three economic systems: Traditional Command Market

The type of Economic System is determined by who answers the three basic Economic questions!

Traditional • Economic questions answered by custom, habit, religion, law • Change comes slowly, often bitterly opposed • Economic choices are limited • Produce same items as ancestors • Jobs handed down from parent to child • Causes of change: disappearance of a resource, war, climate, other outside forces. - Main source of exchange (payment) for goods and services is BARTERING….

What does barter mean? • These days people usually use money to get what they want. In Traditional economies, because money is scarce, people barter to get what they wanted. To barter means “to trade”.

The allocation of scarce resources, and nearly all other economic practices, stems from rituals, habits, customs, community leader(s) Factors of Production ü Land: family property ü Labor: family, friends or assigned by community leader(s) ü Capital: more survival, little to no surplus ü Technology: limited to customs and traditions, changing with the times ü Entrepreneurs: discouraged Traditional Economy The individual role is designed by the village elders or ancestors Advantages ü What: based on village or community needs ü How: generational, you are born into your occupation, increased productivity ü For Whom: the community, very little for individual wants Disadvantages ü Discourages new ideas and methods ü Stalls economic growth ü Limits creativity ü Lowers standards of living – very little wants Economic Activity – Primary Section II: Economic Systems

WHERE ARE THE TRADITIONAL ECONOMIES LOCATED TODAY?

Command Economy • Government owns and controls the factors of production • Economic questions answered by a central planning agency • Use of punishments and rewards to meet production goals • Opposition to change more easily overcome

Command Economy • (Potentially) able to respond more quickly to war, famine, national disasters because of high level of centralization. • A challenge is determining how much of a good or services to produce.

Command Economies Communism Planned economic system in which the government owns and operates all major sources of production Socialism Planned economic system in which the government owns and operates selected major sources of production

The allocation of resources, factors or production, economic decisions and nearly all other economic practices are controlled by a central authority (dictator) Factors of Production ü Land: dictator ü Labor: can change your occupation over night ü Capital: goes to the government to support the country ü Technology: usually limited ü Entrepreneurs: usually controlled by the dictator Command Economy Advantages ü Changes quickly ü Eliminates social class, except government officials ü What: Government needs ü How: Dictator ü For Whom: Government The individual role is controlled or determined by the dictator Disadvantages ü Discourages new ideas and methods ü Controls economic growth ü Limits creative ü Lowers standards of living – very little wants ü Limited desire to work hard

Where would we find Command economies today and from history? 1. CHINA 2. NORTH KOREA 3. CUBA 4. SOVIET UNION – RUSSIA (Mixed today)

Market Economy • Economic questions are answered by the market place- exchanges between consumers and producers. • What- consumers want and are willing to buy. • HOW- at lowest cost (to producer) • For whom- ability to pay • How Much Now v. Later - consumer goods v. capital goods Goods that are consumed quickly v. goods for long term use

Market Economy • No overall government planning • Guiding principle is self-interest: producers want highest price (profit), consumers want lowest price (best buy). • Profit- difference between cost of production and selling price. • Profit Motive- the desire to make money

Market Economy • Four Components of Market System: – Private property – Profit motive – Competition – Freedom of choice Ø Other Terms: Capitalism, Free Enterprise

Free Enterprise System • U. S. is a capitalist economic system • This is all based on private ownership of the four factors of production • Consumers are free to choose what they buy, producers are free to make what they like, and make as much profit as possible.

Free Enterprise Private Property Rights The right to buy, own, use, and sell almost any form of property Freedom of Choice The right to sell your labor to the employer you choose, purchase products you want to buy, choose what to produce or who to hire, etc. Profits Anticipated profits play a large part in individuals’ choices of what goods or services to produce Competition Vying among businesses for the same resources or customers

What is free enterprise? • Both popcorn stands lowered their prices because of free enterprise. Free enterprise means competition. Companies are FREE to compete with one another to get the most customers and make the most money. I decided to buy popcorn from the first popcorn stand, because their price was the lowest. Popcorn $0. 50 --Now $0. 25! Popcorn $0. 50 --Now $0. 30!

Franchise • A business or organization with the right to use an established name and sell trademarked products • Granted for a fee

Advantages of Franchises • Reduced liability due to name recognition and common products • Company usually provides training/products. Disadvantages of Franchises • Freedom to make business decisions is limited • Franchise fees may be expensive • Supplies and products must be purchased from the company

Advantages of Free Market System • encourages most efficient methods of production (profit motive) • encourages innovation in production • allows economic freedom • ensures scarce resources are used carefully Disadvantages of Free Market System • Profit motive – GREED • Over use of resources – lack of conservation • Extreme wealth – abuse of power

Market • Laissez-faire- French term “leave it alone” • little or no government involvement in the economy; few restrictions. – Govt’s. Role is to protect freedom and property, and defend against foreign invasion. • Also called free-enterprise system or privateenterprise system • All together, the idea is limited government involvement in business.

• PRICE is what people pay when they purchase a good or service or what they receive when they sell a good or service. • MARKET exists whenever people buy and sell goods and services. Markets are where PRICES are determined.

Free markets encourage entrepreneurship. • What is an entrepreneur? An entrepreneur is a person who comes up with or creates a product or service, or a better way to produce one. They have the resources, the money, and the time to produce a new product or service. They become PRODUCERS.

Producers People who use resources to make goods and/or provide services

“Pure Market Economy” SUPPLY OUTPUT MARKETS Goods DEMAND Services FIRMS • Supply products in output markets • Demand resources in input markets DEMAND HOUSEHOLDS INPUT MARKETS Labor Capital Entrepreneurs Physical Resources Information Resources • Demand products in output markets • Supply resources in input markets SUPPLY 1 -27

People and firms act in their own best interest to answer the WHAT, HOW and FOR WHOM questions Factors of Production ü Land: Do what you want on your land ü Labor: economic freedom: work where you want; start your business ü Capital: Use your money to buy what you need ü Technology: Economic Freedom ü Entrepreneurs: economic freedom Market Economy Relies on the forces of supply and demand Advantages Disadvantages ü Rewards on production ü Workers and businesses face uncertainty as a result of competition and change ü Limited public goods – defense, education and healthcare ü Vulnerable to market failures ü adjusts w/ change over time – big cars vs small cars ü What: individual freedom to buy or sell ü How: best way to make money ü For Whom: your decision ü Limited government involvement ü Variety of goods and services ü High degree of consumer satisfaction

Market Ø Examples: ü The United States ü Canada ü Britain ü Japan ü Germany ü France

Mixed Economies • No real world economy is a pure economic system. • World economies are a mix of Traditional, Command, and Market.

Adam Smith (1723 -1790) • 1776 Writes the Wealth of Nations. – Attacks the mercantilist system.

The Wealth of Nations (1776)

Invisible Hand Theory – created by the combination of selfinterest, competition, and supply and demand. – he believed the market did the best job of using economic resources in society – I. E. , market economies are most efficient • This provided the foundation for the concept of “Laissez-faire. ”

Basic Capitalist Principles 3. The “Invisible Hand” of the market § Problem How do we survive in a world where we must depend on many others, but where humans are by nature self-interested individuals? ? § Solution the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a socalled invisible hand. ” § Therefore, the basic market mechanism is self-regulating!

Karl Marx – The Communist Manifesto Studied British economic records for 20 years to develop theory that everything is based on the economic system: politics, law, social structures, family relations, even religious belief.

Communist Manifesto (1848) 1. Throughout history, all societies have had class conflict. 2. Those with power (owners) exploit workers. 3. Once a country becomes industrialized, workers will overthrow owners in a bloody & violent revolution. Result: Establishment of society based on equality.

Capitalism

Basic Capitalist Principles 1. Goods and services are produced for profitable exchange. 2. Human labor power is a commodity for sale LABOR IS THE SOURCE OF VALUE. Circular Flow Model Goods & Service Consumer Spending Businesses Households Wages Labor & Investments

Basic Capitalist Principles 4. Individuals seeking success are driven by self-interest Profit Motive 5. The Law of Supply and Demand § Individuals who are free to pursue their self-interest will produce goods and services that others want, at prices others will be willing to pay.

Basic Capitalist Principles 6. Law of Competition § The competitive market system compels producers to be increasingly efficient, and to respond to the desires of consumers. 7. A social division of labor will maximize the satisfaction of individual wants and needs, given scarce resources. 8. Government should interfere minimally with the free and efficient workings of the market § Laissez faire [“Leave things alone. ”]

There, there it is again—the invisible hand of the marketplace giving us the finger.