Economic Systems
Three Economic Questions
⦿
What goods and
services will be
produced?
› What do we have?
⦿
How will they be
produced?
› Hand > machine >
elsewhere
⦿
Who gets the stuff?
3 Economic Systems
⦿
Economic system (economy) – an organized
way of providing for the wants and needs of
people.
1). Command
2). Market
3). Traditional
Command Economies
⦿
Economic activity is planned out by the
government, with people having little
influence.
⦿
Examples:
› Cuba
› North Korea
› Former Soviet Union
Command Economies - Pros
⦿
Allows an economy to change direction very
quickly.
› After Stalin’s first two Five Year Plans, Russia
moved from a rural agricultural economy to an
industrial economy.
Command Economies - Pros
⦿
Little uncertainty as to who will do what.
⦿
No unemployment because the government
gives everyone a job (whether it is needed or
not).
› Ayn Rand - Anthem
Command Economies - Cons
⦿
Not designed to meet the wants of
consumers.
› Stalin’s Five Year Plan directed resources away
from both agriculture and consumer goods.
⦿
Provides strange incentives
› Do just enough to meet quotas.
Command Economies – More Cons
⦿
No rewards for individual performance.
› Tetris
⦿
No flexibility to handle problems.
› Great Depression disrupted the USSR’s First Five
Year Plan
⦿
Requires a large decision making agency.
› Stalin’s Five Year Plans governed all economic
activity in Russia…that’s a lot of paperwork!
Market Economies
⦿
People and businesses act in their own best
interests to answer the three basic economic
questions.
Market Economies – How they work
⦿
Lure of personal and
financial gain leads
consumers and
businesses to interact
in various markets.
⦿
Each person acts as
they see fit in order to
advance their own
interests.
The First Economist – Adam
Smith
⦿
“It is not from the
benevolence of the
butcher, the brewer, or
the baker that we
expect our dinner, but
from their regard to
their own interest.” –
Wealth of Nations,
1776
Market Economies - Pros
⦿
Economy can adjust to change over time
› Businesses can adapt to changing consumer
tastes by creating new/different products.
⦿
High degree of individual freedom
› Businesses and individuals are free to do what they
want.
Market Economies – More Pros
⦿
Small degree of government interference
(Mixed Economy)
⦿
Economic decisions are made by all, not
limited to government officials.
⦿
Seemingly unlimited variety of goods and
services available to consumers.
Market Economies - Cons
⦿
Does not provide for the basic needs of
everyone.
› Elderly, disabled and other groups would be unable
to survive in a market economy without
governmental assistance.
Market Economies – More Cons
⦿
Does not provide certain
services that people
value.
› National Defense &
Education.
⦿
High degree of
uncertainty
› Tommy Boy
› Jobs going overseas
› Market Failures
Traditional Economies
⦿
Economic activity is
based on tradition with
roles determined by
previous generations.
⦿
Examples:
› Medieval Europe
› Various hunting tribes in
Africa and northern
Canada
Traditional Economies – Pros
⦿
Everyone knows
what their role is.
⦿
Life is generally
predictable and
stable.
Traditional Economies - Cons
⦿
Discourages new ideas and new ways of doing
things.
⦿
Lack of progress leads to a lower standard of
living.
The US Economic System
⦿
Mixed Economy
⦿
Capitalism
⦿
Based on 4 important principles
›
›
›
›
Private Property
Freedom of choice
Profit
Competition
Economic Goals
⦿
⦿
⦿
⦿
Economic Freedom
Economic Equity
Economic Security
Price Stability
Economic Freedom
⦿
Individuals have freedom to choose their
own occupations, employers, and spending
habits.
⦿
Businesses have freedom to choose how
and where to produce goods/services.
⦿
Are we meeting this goal?
Economic Equity
⦿
People should receive equal pay for equal work.
⦿
People should receive adequate pay for the work they
perform.
⦿
People should all have the same opportunities to get
ahead.
⦿
Are we meeting this goal?
Economic Security
⦿
We should have protection from negative
economic events such as layoffs and injuries.
› Social Security – federal program that provides
disability and retirement benefits.
⦿
Everyone should have their basic needs met.
⦿
Are we meeting this goal?
Price Stability
⦿
We should have stable prices that protect
against inflation.
› Inflation – a rise in the general level of prices.
⦿
Are we meeting this goal?
When economic goals are not met…
…People get mad!!!!!!!
John Mellencamp - Scarecrow
As you listen, think about
the goals of:
⦿ <Link to video>
⦿ Economic Equity?
⦿ Economic Security?