Unit 2 – Lesson 1 – Econ Systems Mr. Mable Econ 6120 Economic Systems Unit 2 – Lesson 1 – Econ Systems Mr. Mable Econ 6120

EPF – SOL STANDARDS EPF.1 The student will demonstrate knowledge of basic economic concepts and structures by e) comparing the characteristics of market, command, traditional, and mixed economies (BUS6120.034) Day 1 The three basic questions Day 2 Command, traditional, and market economies Day 3 The free market and the US economy f) identifying Adam Smith and describing the characteristics of a market economy (BUS6120.034) Day 1 Competition and the invisible hand Day 2 Property rights

3. Economic Systems

Unit Plan – Econ Systems The problem of scarcity forces every society to make difficult choices about how to use its resources. In trying to decide how to allocate those scarce resources, each society must answer three critical questions. How those questions are answered determines the type of economic system (market, command, traditional, mixed) that is present.

What is an Economic System? The institutional framework of formal and informal rules that a society uses to decide the 3 economic questions

•Manufacturing. Transformation of materials into intermediate and finished goods. •Regulation. The way the production system is controlled and regulated. Mostly the role of governments, but increasingly of international multilateral agreements. •Circulation. Activities that link the elements of the production system. Includes transport and communications. •Distribution. Activities making goods and services available to the consumer, such as retailing.

With the emergence of logistics, the elements of circulation and distribution are increasingly embedded. Further, all these elements, especially manufacturing, are using inputs for their processes, also known as factors of production. They include land (including natural resources), capital and labor. The enterprise itself is often considered as the fourth factor as its main purpose is the organization of the other factors of production.

The Three Basic Economic Questions Many entrepreneurs find themselves asking thousands of questions before starting a business.

These can be compressed into three basic economic questions: 1. What goods and services will be produced? 2. How will these goods and services be produced? 3. Who will consume these goods and services?

Four Types of Economies Traditional Free Market (Pure Capitalism) Command Economy (Communism) Mixed Economy (Blend of the two above)

Traditional Economy An economy in which customs and habits from the past are used to resolve most economic issues of production and distribution. traditional economies are inefficient and lack an incentive to grow and change “What has always been done.”

TRADITION SONG That’s Just the Way It Is by Bruce Hornsby and the Range http://www.youtube.com/watch?v=cOeKidp-iWo

Traditional Economy the same tools and resources The kind of work people do the goods people produce, and the way people use and Farming, hunting, and gathering are conducted in the same ways as the generation before.

Traditional Economy A traditional economy is less dynamic compared to other economic systems. People produce only enough goods for their own needs and leave a very small amount for trading. In a traditional economy, the questions of what people are supposed to produce, how

Traditional Economy much they produce, and who will receive the production are very predictable. People follow their production traditions most of the time. To some extent, custom governs the economic decisions that are made in a traditional economy,

TRADITION VIDEO “Tradition”, from Fiddler on the Roof (the first 3:50 of the clip are sufficient) http://www.youtube.com/watch?v=gRdfX7ut8gw

Are there any traditional economies still today in the world Are there any traditional economies still today in the world? Someone give an example

Example of traditional The Inuit people of northern Canada offer a good example of a traditional economy. They use the snow to make igloos with doors covered with seal intestines; they also make summer tents from animal skins. Their main food source is flesh from seals, caribou, and other animals. They sew their animal skin clothes with thread. Most of the tribe’s economic decisions are based on religious and traditional beliefs. Elders of clans have the most power to make decisions.

Inuit people

What are your family holiday traditions? Thanksgiving? Where do you go? What do you eat? What do you buy? Who makes these decisions?

TODAY Due to modern technology, traditional economies are not common in the world. The Industrial Revolution, which introduced more advanced technical methods into the agricultural process and used machines to produce goods, transformed the world and led eventually to the modern market economy.

Historically, What Nations have had total control of their economies?

Command Economies

Command economy – An economy in which most economic issues of production and distribution are resolved through central planning and control.

Command Economy A command economy takes the freedom to choose from the individuals in society and transfers it to a smaller group. It is impossible for this group to have all of the information necessary to efficiently and effectively allocate resources in a way that will satisfy the greatest number of wants.

Command Economies TODAY CHINA

Command Economies TODAY NORTH KOREA

Command Economies TODAY CUBA

FREE MARKET ECONOMY

Free Market economy – An economy that relies on a system of interdependent market prices to allocate goods, services, and productive resources and to coordinate the diverse plans of consumers and producers, each of them pursuing their own self-interest.

Free Market All market economies have several basic characteristics in common including private property, free enterprise, self-interest, competition, a price system and limited (laissez-faire) government. Property rights, defined as individual ownership and control of resources and products, are a fundamental characteristic of a market system. Property rights affect the way markets allocate resources. If property rights are well defined and enforced and markets are competitive, a market system ensures that resources are used in their most valued manner.

MIXED ECONOMY

Mixed Economy Mixed economy – An economic system that exhibits characteristics of more than one type of economic system. Most modern systems are mixed and have various aspects of command, market and traditional systems within them.

Virtually all modern economies, including the economy of the United States, contain some parts of the command, market and traditional economic systems within them.

What characteristics do wealthy nations have in common? Investments in human and physical capital Economic freedom Lower taxes Less government regulation Sound monetary policy Protection of property rights Incentives to save, invest, increase productivity Competitive markets Low inflation Political stability

The American economy uses a market system to make many allocation decisions, and it is important for students to understand why the market system is used so extensively. Students also should be able to compare the characteristics of a market system with alternatives used more extensively in some other countries. With this understanding, students can assess the benefits and costs of alternative allocation systems when discussing difficult questions such as how incomes should be divided among people or who should receive a kidney transplant and who should not

Econ Video What is Econ? http://www.youtube.com/watch?v=ayRnEaiWnTk Do this last!

What is the difference between what a government does and what an economy does?

What 3 Basic Questions do all economies have to answer? What to produce? How to produce? For whom to produce?

What are the main types of economies. Who owns the resources What are the main types of economies? Who owns the resources? Who decides?

Main Types of Economies Command Market Tradition Mixed

Why are some nations rich and others poor? Which of these nations do you think is the wealthiest? A B C D E

Hans Roslings: Four Minutes 200 years http://www.youtube.com/watch?v=jbkSRLYSojo