1 © 2010 South-Western, a part of Cengage Learning Chapter 16 Economies in Transition Microeconomics for Today Irvin B. Tucker

© 2010 South-Western, a part of Cengage Learning 2 What will I learn in this chapter? The different forms of economic systems and how they operate The different forms of economic systems and how they operate

© 2010 South-Western, a part of Cengage Learning 3 What is an economic system? Determines what good and services are produced, how they are produced, and for whom they are produced Determines what good and services are produced, how they are produced, and for whom they are produced

© 2010 South-Western, a part of Cengage Learning 4 What are the basic types of economic systems? Traditional Traditional Command Command Market Market

© 2010 South-Western, a part of Cengage Learning 5 What is a traditional economy? A system that answers the what, how, and for whom questions the way they always have been answered A system that answers the what, how, and for whom questions the way they always have been answered

© 2010 South-Western, a part of Cengage Learning 6 What is the benefit of a traditional economy? There is little friction among members because relatively little is disputed There is little friction among members because relatively little is disputed

© 2010 South-Western, a part of Cengage Learning 7 What are the disadvantages of a traditional economy? Restricts individual initiative Restricts individual initiative Lack of advanced goods, new technology, and growth Lack of advanced goods, new technology, and growth

© 2010 South-Western, a part of Cengage Learning 8 What is a command economy? A system that answers the what, how, and for whom questions by central authority A system that answers the what, how, and for whom questions by central authority

© 2010 South-Western, a part of Cengage Learning 9 What is the structure of a command economy? It has a pyramid structure It has a pyramid structure

© 2010 South-Western, a part of Cengage Learning 10 The Command Economy Pyramid

© 2010 South-Western, a part of Cengage Learning 11 What are the strengths of a command economy? Economic change can occur very quickly Economic change can occur very quickly Social welfare can be enhanced Social welfare can be enhanced

© 2010 South-Western, a part of Cengage Learning 12 What are the weaknesses of a command economy? Decision makers have the power to be absolutely wrong Decision makers have the power to be absolutely wrong Quality and variety of goods suffer Quality and variety of goods suffer

© 2010 South-Western, a part of Cengage Learning 13 Planners set the price of mirrors below equilibrium Shortage of mirrors

© 2010 South-Western, a part of Cengage Learning $20 $60 $80 $40 Price per side mirror (rubles) Quantity of side mirrors (thousands per day) E Price set by planners Shortage of 400,000 thousand side mirrors S D Central Planners Fixing Prices

© 2010 South-Western, a part of Cengage Learning 15 What is a market economy? An economic system that answers the what, how, and for whom questions by the free market An economic system that answers the what, how, and for whom questions by the free market

© 2010 South-Western, a part of Cengage Learning 16 Who was Adam Smith? The father of modern economics who believed that a free market economy acted like an “invisible hand” The father of modern economics who believed that a free market economy acted like an “invisible hand”

© 2010 South-Western, a part of Cengage Learning 17 What book did Adam Smith write? The Wealth of Nations published in 1776 The Wealth of Nations published in 1776

© 2010 South-Western, a part of Cengage Learning 18 What is the invisible hand? The belief that the best interests of a society are served when individuals are allowed to act in accordance to their own self interest The belief that the best interests of a society are served when individuals are allowed to act in accordance to their own self interest

© 2010 South-Western, a part of Cengage Learning 19 What is the advantage of a market economy? It provides a wide variety of goods and services that buyers and sellers exchange at the lowest prices It provides a wide variety of goods and services that buyers and sellers exchange at the lowest prices

© 2010 South-Western, a part of Cengage Learning 20 What are criticisms of a market economy? lack of competition lack of competition externalities externalities lack of public goods lack of public goods income inequality income inequality

© 2010 South-Western, a part of Cengage Learning 21 What is a mixed economy? An economic system that answers the basic questions through a mixture of traditional, command, and market systems An economic system that answers the basic questions through a mixture of traditional, command, and market systems

© 2010 South-Western, a part of Cengage Learning 22 What is capitalism? An economic system characterized by private ownership of resources and markets An economic system characterized by private ownership of resources and markets

© 2010 South-Western, a part of Cengage Learning 23 What is consumer sovereignty? The freedom of consumers to cast their dollar votes to buy, or not to buy, at prices determined in competitive markets The freedom of consumers to cast their dollar votes to buy, or not to buy, at prices determined in competitive markets

© 2010 South-Western, a part of Cengage Learning 24 What kind of system does the U.S. have? No nation in the world precisely fits the two criteria for capitalism, but the U.S. comes close No nation in the world precisely fits the two criteria for capitalism, but the U.S. comes close

© 2010 South-Western, a part of Cengage Learning 25 What is socialism? An economic system characterized by government ownership of resources and centralized decision making An economic system characterized by government ownership of resources and centralized decision making

© 2010 South-Western, a part of Cengage Learning 26 Who was Karl Marx? His criticism of capitalism advanced communism His criticism of capitalism advanced communism

© 2010 South-Western, a part of Cengage Learning 27 What two books did Karl Marx write? The Communist Manifesto, 1848 The Communist Manifesto, 1848 Das Kapital, Das Kapital,

© 2010 South-Western, a part of Cengage Learning 28 What is communism? A stateless, classless economic system in which the factors of production are owned by everyone, who share in accordance to their needs A stateless, classless economic system in which the factors of production are owned by everyone, who share in accordance to their needs

© 2010 South-Western, a part of Cengage Learning 29 What are characteristics of socialism? public ownership public ownership centralization centralization

© 2010 South-Western, a part of Cengage Learning 30 What are the strengths of socialism? an equitable distribution of income an equitable distribution of income rapid growth is possible rapid growth is possible no unemployment no unemployment

© 2010 South-Western, a part of Cengage Learning 31 What are weaknesses of socialism? inefficiencies inefficiencies stifles growth stifles growth

© 2010 South-Western, a part of Cengage Learning 32 A Classification of Economic Systems

© 2010 South-Western, a part of Cengage Learning 33 How is Cuba in transition? Despite limited free market reforms, Cuba remains essentially a communist system Despite limited free market reforms, Cuba remains essentially a communist system

© 2010 South-Western, a part of Cengage Learning 34 How is Russia in transition? Privatization plans are being implemented and steps are continuing to create a dynamic capitalist economy Privatization plans are being implemented and steps are continuing to create a dynamic capitalist economy

© 2010 South-Western, a part of Cengage Learning 35 How is China in transition? China is a market of great profit and promise as it continues its transition from communism to capitalism China is a market of great profit and promise as it continues its transition from communism to capitalism

© 2010 South-Western, a part of Cengage Learning 36 END