Traditional - Command – Market - Mixed Economic Systems Traditional - Command – Market - Mixed

Economic Systems - Traditional An economic system in which people produce only what they must have in order to exist. Oldest and simplest form of an economic system. Tribal – Family Units Rely on habit, tradition, or ritual. (work divided among gender lines) Slow to adapt to new ideas or technology Lack modern conveniences Low standard of living

Economic Systems Two General Economic Systems: Market Economy An economic system in which the questions of what, how, and for whom goods will be produced are answered by individuals and businesses in the marketplace. Command Economy (Centrally Planned) An economic system in which all or many of the means of production and distribution are owned and controlled by the government.

Economic Systems NOTE: No country has a pure Market or pure Command Economy…. ALL countries are mixed. So, where does any given country fall on the continuum? Market Command ? ? ?

Economic Systems How do we determine, or measure, the type of economic system a country follows? Three Questions are answered: What goods and services are produced? How should these be produced? For Whom should these be produced?

Economic Systems Market Economy

Economic Systems - Market 1st Question What goods should be produced? Consumers decide Private businesses emerge to meet consumer’s wants and needs. ADVANTAGE: MARKET SYSTEM

Economic Systems - Market 2nd Question How should goods be produced? Businesses decide. Decisions on hiring, wages, and production methods, all left up to owners. Companies become more efficient as they must compete to become successful. Employment not guaranteed as owners look to create efficiencies (unemployment volatile) ADVANTAGE: MARKET SYSTEM DISADVANTAGE: MARKET SYSTEM

Economic Systems - Market 3rd Question For Whom should goods be produced? For whomever can afford it. If you do not have money you cannot buy the good. TOO BAD. ADVANTAGE: MARKET SYSTEM Nobody is entitled to goods or services. To be able to buy goods, people are motivated to work and earn money. DISADVANTAGE: MARKET SYSTEM

Economic Systems Command Economy

Economic Systems - Command 1st Question What goods should be produced? Government decides. Government chooses what is important to spend their limited resources on. EX: military vs. furniture. Thus, shortages will exist for goods that aren’t deemed important by government DISADVANTAGE: COMMAND SYSTEM

Economic Systems - Command 2nd Question How should goods be produced? Government decides. Govt owns the means of production. They employ workers and control industry. They set wages and determine schedules. No bargaining or competition. DISADVANTAGE: COMMAND SYSTEM

Economic Systems - Command 3rd Question For Whom should goods be produced? Government decides who gets what and how much. Every one has basic needs met. Limits Economic Freedom: Govt runs housing (says where to live), provides food (rations what to eat), provides jobs (determines where to work) DISADVANTAGE: COMMAND SYSTEM ADVANTAGE: COMMAND SYSTEM

Economic Systems (REVIEW) Two General Economic Systems: Market Economy Command Economy (Centrally Planned) NOTE: No country has a pure Market or pure Command Economy….all are mixed. Market Command

Economic Systems - MIXED All economic systems are Mixed …but to what degree? Three Basic Models (philosophies) Capitalist Model Socialist Model Communist Model Command Market Communist Socialist Capitalist

Capitalism Economic Systems An economic system that depends on honest, healthy competition between businesses

Economic Models – Capitalism Based on the philosophies of economist Adam Smith He professes that capitalism is based on “self-interest” and “competition”

Adam Smith’s “THE INVISIBLE HAND”

“THE INVISIBLE HAND” SELF INTEREST Adam Smith’s “THE INVISIBLE HAND” SELF INTEREST People (businessmen) are interested in getting money for themselves

In a free market system, how do businessmen get money? They have to produce a product that people will want to VOLUNTARILY give them money for.

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Adam Smith’s “THE INVISIBLE HAND” COMPETITION The struggle among producers for the dollars of consumers

What happens when businesses compete? LOWER PRICES

What happens when businesses compete? LOWER PRICES BETTER QUALITY

What happens when businesses compete? LOWER PRICES BETTER QUALITY NEW PRODUCTS

the regulating force In a free market, competition is as long as businesses are allowed to compete, prices should be low, quality should be high, and new technologies should advance.

“GREED IS GOOD” “THE INVISIBLE HAND” SELF INTEREST Adam Smith’s “THE INVISIBLE HAND” SELF INTEREST “GREED IS GOOD” COMPETITION SELF-INTEREST and COMPETITION work together to regulate the market (an economy)

Economic Models – Capitalism Self-Interest is the motivating force in the free market. (people are interested in making money !) To make money you must produce a product that people will voluntarily give you money for. Because owners want to make a lot of money they have an incentive to produce what consumers want. ADVANTAGE: MARKET SYSTEM

Economic Model - Capitalism Competition exists in capitalism as businesses struggle to gain those voluntary dollars from consumers. As businesses compete for profit, the market is “regulated” as companies have incentive to lower prices and provide new and better products. ADVANTAGE: MARKET SYSTEM

Socialism Economic Systems A modified command economic system in which government owns the basic means of production and allows private ownership of businesses as well

Economic Model - Socialism Government attempts to reduce the difference between rich and poor. (Classless system – reduce poverty) Key industries run by government to control prices and prevent mass unemployment (ex. energy, steel, communication, health care, agriculture) ADVANTAGE: COMMAND SYSTEM ADVANTAGE: COMMAND SYSTEM

Economic Model - Socialism Socialism also believes that all people should have services provided for them…health care, schooling, pensions. (Cradle to grave coverage) To do this, those who make money are taxed heavily to “redistribute wealth” and provide all with services. Businesses are highly regulated (vacations, hours, minimum wages, etc) DISADVANTAGE: COMMAND SYSTEM ADVANTAGE: COMMAND SYSTEM

Communist Model Economic Systems a command economic system in which the government CONTROLS the economic system and does NOT allow private ownership of the means of production and distribution

Economic Model - Communism Based on the philosophies of Karl Marx Marx argued that all the profit created by the labor of workers ended up in the hands of the capitalists (owners) He argued that the inevitable result of capitalism was the exploitation of workers and an unfair distribution of wealth. (large gap between rich and poor) DISADVANTAGE: MARKET SYSTEM

Economic Model - Communism Government runs everything. All people are assigned jobs / school Housing assigned according to need Medical care is free Government determines products

Economic Model - Communism This system provides no incentive to work harder to earn more money as the government dictates what you make and were you work. System fails as there is no competition to improve technology or efficiencies. Privatization ultimately happens (businesses eventually allowed to be privately owned…not govt owned) DISADVANTAGE: COMMAND SYSTEM

Economic Systems - MIXED All economic systems are MIXED. North Korea Cuba Russia China France Germany Japan United States Canada Hong Kong Communism Socialism Capitalism Command Market Economic Freedom Index