1. CONTEMPORARY ECONOMICS
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Economic Systems
Business Economics
LESSON 2.1

2. CONTEMPORARY ECONOMICS
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Objectives
Three Economic Questions
The Economic Systems
Examples of Countries
Research Project
LESSON 2.1

3. Three Economic Questions
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Three Economic Questions
All economies must answer these three questions:
1. What goods and services will be produced?
2. How will they be produced?
3. For whom will they be produced?
LESSON 2.1

4. Country use & distribution of scarce resources
History
Culture
Geography
Political Situation
Various of factors

6. CONTEMPORARY ECONOMICS
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Economic System
An economic system is the method used by a society to produce and distribute goods and services.
Some questions to ask:
Who owns the resources?
What decision-making process is used to allocate resources and products?
What types of incentives guide economic decision makers?
LESSON 2.1

7. Political & Economic Philosophies
Capitalism
1. Marketplace competition
2. Private ownership of business
3. Successful employers & employees prosper
4. Some social services
5. Some gov’t regulations
1. Usually authoritarian
2. Controls factors of production
3. Assigned jobs
4. Goods given according to need
5. No financial incentive to increase productivity
Communism
1. More gov’t involvement in economy & social services
2. Tax rates high
3. gov’t may run key industries
4. gov’t makes many economic decisions
Socialism

8. Communism
The gov’t, usually authoritarian, controls the factors of production
No private ownership of property or capital
The theory is that goods owned in common are available to a classless society on an as needed basis
People are given jobs based on their abilities
They are given the goods that fit their needs

9. Characteristics All people who are able to work are assigned jobs
Theoretically, there is no unemployment
Employees who do not go to work continue to get paid
The gov’t decides the type of schooling everyone gets and tells people where to live
Housing accommodations are assigned according to need

10. Characteristics
Food & housing subsidies (aids) keep prices low so everyone has a place to live and food to eat
Medical care is free
Little or no economic freedom
No financial incentive for people to increase productivity
Want to be entrepreneurs cannot start their own business

11. Strong Command Economy
CONTEMPORARY ECONOMICS
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Strong Command Economy
The gov’t owns and controls
Factories, equipment, land
Leaders answer the 3 basic questions
Political structure
Communism
LESSON 2.1

12. Command Economy
Influenced by commands, directives or central authority
One person, small group who control society
Members of society carry out demands
Kim Jong II
Fidel Castro

13. Economies in Transition
Prior to the Soviet Union breakup, Poland owned approx 80% of the country’s productive assets
After the breakup, it owned only 55%
Poland welcomed private investors that wanted to buy its state-run factories, which were inefficient & non productive

14. Privatization vs. Nationalization
Privatization – the processes of gov’t selling gov’t-owned businesses to private individuals/businesses
Generates much needed revenue
Demonstrates a high level of commitment to making the transition to a market system
Can help balance budgets

15. Privatization vs. Nationalization
Nationalization – the gov’t takes over private-held companies
Transfer of ownership may be due to an economic crisis, a political upheaval, or a change in gov’t policy

16. Developing Economies
Mostly poor countries with little industrialization
Trying to become more prosperous & develop infrastructure
Success depends on the education of the labor force
Chad, an African Country, is a developing country
Traditional economy based on agriculture & livestock farming
Cotton, cattle, & gum arabic are its primary exports
An oilfield & pipeline project paid by foreign investors has helped Chad develop its oil reserves for export
This will help Chad with much needed funds for this poor nation

17. CONTEMPORARY ECONOMICS
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Traditional Economy
Shaped largely by custom or religion
Family relations play significant roles in economic activity
Same methods of production are used
Roles are narrowly defined
LESSON 2.1

18. Traditional Economy Advantage Everyone has a role in it Disadvantage
Discourage new ideas and way of doing things
Rain forests of Latin America
Parts of Africa
Middle East

19. Socialism
Originally referred to a system on its way to the communist ideal of a classless society
Today, most countries that are defined as this, have democratic political institutions
They differ from capitalist nations because of the increased amount of gov’t involvement
Main goal is to meet basic needs for all & to provide employment for many

20. Characteristics
Tend to have more social services to ensure a certain standard of living for everyone
Medical care & education are free or inexpensive
Systems for pensions and elderly care
Businesses & individuals pay much higher taxes than those in capitalist countries
Taxes contribute to financing the gov’t

21. Examples of Socialist Countries
The gov’t runs key industries & makes economic decisions
State-controlled, noncompetitive companies are often found in industries such as:
telecommunications, natural resources (such as gas, water, & power), transportation, & banking
Canada, Germany, & Sweden are generally characterized have having socialist elements in their economies

22. Moderate Command Economy
Political structure = Socialism
Gov’t owns major industries
Railroads, steel & iron industry
Limited opportunities for private ownership
Sweden
France

23. Problems with Centrally Planned Economies
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Problems with Centrally Planned Economies
Consumers get low priority
Little to No freedom of choice
No reward for innovation
How much should be produced?
Typically results in surpluses and shortages
LESSON 2.1

24. Invisible Hand of Markets
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Invisible Hand of Markets
According to economist Adam Smith (1723–1790), market forces coordinate production as if by an “invisible hand.”
LESSON 2.1

25. Laissez Faire 18th century economic theory
“Let it be economics”
Stands for “Leave Alone”
Strongly oppose government intervention in business affairs
Against minimum wage, duties (taxes on certain goods) & trade restrictions

26. Capitalism
Characterized by marketplace competition and private ownership of businesses
Same as free enterprise or private enterprise
An advantage is that successful employers & employees prosper

27. Characteristics
Government is concerned about its people and cares for those who cannot care for themselves
The gov’t also has some involvement in the free market
Policies and laws that affect the market
Must keep a balance between too much and too little regulation

28. Political Foundations of Capitalism
The political system most frequently associated is democracy
These nations believe that political power should be in the hands of the people
Usually more than one political party from which to choose representatives to run the gov’t
People are free to elect those candidates who agree with their philosophy on how the gov’t & economy should be run

29. Political Foundations of Capitalism
The US and Japan are 2 examples of countries that are classified as capitalist and have a democratic form of government

30. CONTEMPORARY ECONOMICS
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Market Economy
Regulation by government is minimal
Economic activity
based on the prices generated in free, competitive markets
Economic questions
Buyers & sellers
Referred to as Capitalism
LESSON 2.1

31. Market Economy Buyers & Sellers Sellers & Producers
Economic decisions are based on
Buyers & Sellers
Produce goods & services that will provide profit
Sellers & Producers

32. Plusses & Minuses of Market Economies
CONTEMPORARY ECONOMICS
Plusses & Minuses of Market Economies
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Difficulty enforcing property rights
Some people have few resources to sell
Some firms try to monopolize markets
“You need money to make money”
Freedom for everyone to be involved
Adjusts as consumer wants & needs change
LESSON 2.1

33. Essential Question
Why do most countries have a mixed economy?

34. What Do You Like on a Sundae?
What toppings do you like on an ice cream sundae?
Plain Vanilla?
Or absolutely everything (and I mean everything)?

35. What Do You Like on a Sundae?
Chances are, you were somewhere between plain and everything.
When discussing economies, most countries are somewhere in between too.
When a country is not completely a command economy and not completely a market economy, but somewhere in between, it is called a Mixed Economy.

36. Mixed Economy – “In Between”

37. Most Countries Lie Somewhere in Between
Most Countries Lie Somewhere in Between -However, they may be closer to one side than the other.

38. 7 Roles of Government in a mixed economy
Establishing and enforcing rules of exchange
Property rights
Contract law

39. 7 Roles of Government in a mixed economy
Promoting competition/prevent anticompetitive practices

40. 7 Roles of Government in a mixed economy
Regulating natural monopolies
One firm that can serve the entire market at a lower per- unit cost than can two or more firms

41. 7 Roles of Government in a mixed economy
Provide public goods
Technical characteristics of public goods:
Non rival consumption
High cost of excluding those who do not pay

42. 7 Roles of Government in a mixed economy
Dealing with externalities
Externality is a cost or benefit that falls on third parties and is therefore ignored by the two parties to the market transaction
Negative externality – cost imposed on others
Positive externality – benefit gained by others
Visibility Impairment from Air Pollution Shenandoah National Park - Virginia

43. 7 Roles of Government in a mixed economy
Redistribute income
President F.D. Roosevelt Signing the Social Security Act of 1935

44. 7 Roles of Government in a mixed economy
Promote macroeconomic goals of:
Full employment
Price stability
Economic growth
Monetary policy pursued by the Federal Reserve
Fiscal policy pursued by the Federal government

45. CONTEMPORARY ECONOMICS
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Examples of Economies
Mixed:
Canada
Germany
Netherlands
United Kingdom
Italy
Traditional:
Philippines
Nigeria
Nicaragua
Sao Paulo
Mumbai
Command:
Cuba
North Korea
China
Russia
Iran
LESSON 2.1

46. In-Class Research Project
CONTEMPORARY ECONOMICS
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In-Class Research Project
Objective of Project:
- For you to research and learn about the economy of a specific country.
You will research a country of your choosing.
The Instruction sheet will provide you with clear directions.
LESSON 2.1

47. What is the G20? Promotes international cooperation
Global economic stability
Prevent future financial crisis
Argentina
Australia
Brazil
Canada
China
France
Germany
India
Indonesia
Italy
Japan
Mexico
Russia
Saudi Arabia
South Africa
Republic of Korea
Turkey
United Kingdom
United States

48. CONTEMPORARY ECONOMICS
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CIA World Factbook
LESSON 2.1