Economic Systems

Unpacking the Standard SSEF4 Compare and contrast different economic systems and explain how they answer the three basic economic questions of what to produce, how to produce, and for whom to produce. Compare traditional, command, market, and mixed economic systems with regard to private ownership, profit motive, consumer sovereignty, competition, and government regulation. Analyze how each type of systems answers the three economic questions and meets the broad social and economic goals of freedom, security, equity, growth, efficiency, price stability, full employment, and sustainability. Compare and contrast strategies for allocating scarce resources, such as by price, majority rule, contests, force, sharing, lottery, authority, first-come- first serve, and personal characteristics.

Every society has to answer 3 key economic questions… The Economic Questions What to produce? How to produce? For whom to produce? For whom to produce? How do we decide who gets the goods/services that are produced? Does everyone get the same amount? Should people who work harder or invent something new get more? What about the elderly who can’t work as hard? What to produce? What does your country want to make? Cars? Fighter jets? Corn? Wheat? Whatever that country decides to produce, there’s going to be tradeoffs because of scarcity and limited resources. How to produce? Will you use workers or machines? Will you have production within your country or outsource it somewhere else? These are decisions businesses have to make so they use their resources efficiently.

How does a society allocate (distribute) their resources? How do we allocate resources? Price Majority rule Contests Force Sharing Lottery Authority First come, first serve Personal characteristics

When each economic system is trying to decide how best to allocate their resources, they have to consider their goals. What are they trying to accomplish? Economic Goals: Economic Growth: an increase in the production of goods and services over time. Higher standards of living. Innovation. Efficiency: making everyone better off without making anyone worse off. Produce what people will consume, don’t waste resources. Equity: the quality of being just and fair. Equity of outcome: everyone should share equally in what the economy produces. Equity of opportunity: everyone should have the same opportunities in life Economic Security: people can support themselves and their families. Social Safety Net: government assistance with financial needs. Economic Freedom: the ability to make economic decisions for yourself. Where to work, what to buy, what to produce Stable Prices: controlling inflation; protection of purchasing power of money Full Employment: No cyclical unemployment (everyone who wants a job, has one) Sustainability: Steady growth in real GDP

There are three main types of economic systems in the world. Traditional Command Market *Most economies are a mix of all 3*

Traditional Economies: What, how, for whom to produce is answered through tradition, habit, religion. This is the way we’ve always done it. You do whatever job your family has always done.

Traditional Economies Advantages Disadvantages Economic Security: everyone has a job and a role Sustainability: slow growth; can usually provide for all members Lack of economic growth, freedom, or high standards of living

Command Economies Central planners make the decisions about what, how, and for whom to produce. Private individuals make none of these decisions. Someone else does it for you.

Command Economies Advantages Disadvantages Economic Security: everyone has a job; gov’t gives you one. No safety net: everyone is paid by the gov’t Basic needs met Can adjust quickly to changes in production. No economic freedom. Gov’t owns factors of production. Low standard of living (no incentive to work hard) Low quality products Weak economic growth Short on consumer goods (rationing) Underground markets All the disadvantages are why most countries have abandoned command economies and moved towards market economies.

Market Economies Economic decisions are made by business owners and consumers. Capitalist System: resources are privately owned. Voluntary Exchange: you willingly engage in trade (buy what you want)

Market Economies Advantages Disadvantages Individuals own factors of production. High availability of goods. Higher standard of living. Efficient production. Rapid economic growth. Incentives, competition, profit. More freedom No gov’t regulation on business practices Equity: large gap between rich and poor. Economic security: no central planner to financially support. Lack of resources conservation. Most economies are mixed because without government regulation, businesses can have bad business practices. Drugs not tested fully before going to market, false advertising, market takeovers, price controls, etc.