Economics 120 Types of Economies

Three Key Questions  What is to be produced?  How is it going to be produced?  Who gets what is produced?

Four Types of Economic Systems  A traditional economy  A command, or planned, economy  A market or free market economy  A mixed economy

Traditional Economy  Three key questions are answered by “tradition” or past practice  Produce the same goods, the same ways and in the same quantities as in the past  Still seen in a lot of underdeveloped countries  Skills are passed along from generation to generation

Traditional Economy  Pros Stability and security for population All members know their economic roles Produces what best ensures its survival  Cons No innovation (resist change) Unable to adapt to the world around it Improvement in economic life is limited

Command Economy  Answers the 3 questions with the use of a central authority.  Central authority owns the natural and capital resources and decides how they are to be used, what will be produced and how they will be distributed.  Closely associated with the so-called communist regimes in Russia and Eastern Europe

Command Economy  Factories, farms and so on were given directions about what they should be producing  Wage differentials were minimal - whether you were a highly qualified university professor or a street cleaner, wages only varied by a small amount

Command Economy  Former USSR had no unemployment, no inflation and no homeless people. Anyone who wanted a job had could have one and the State provided housing.  Expectation that each person was not working for their own benefit but for the good of the state.  Still exists in (to some extent) some countries, such as Cuba and some countries in Africa, North Korea

Command Economy  Pros Central Planning Resources can be focused consistently based on gov’ts objectives  Cons People may not agree with the objectives set by the government No freedom to move from job to job May be forced to take a certain career path

Market Economy  Pure market economies rarely exist but in theory  Answers the three questions that form the economic problem through a market system (supply and demand)  Natural and capital resources are privately owned.

Market Economy  Price has a central role. It acts as a signal to both consumers and producers.  If prices are falling then this suggests demand is also falling.  USA is close to being a market economy.

Market Economy  Pros Goods and services produced are those that consumers want Workers free to move from job to job and negotiate terms of employment Profit Competition  Cons Consumer decisions about what is to be produced may be unwise (alcohol and tobacco vs schools and hospitals) Inequalities of wealth Goods not necessarily distributed fairly No mechanism for providing public goods and services (nat’l defense)

Market Economy – “Invisible Hand”  The theory of the Invisible Hand states that if each consumer is allowed to choose freely what to buy and each producer is allowed to choose freely what to sell and how to produce it, the market will settle on a product distribution and prices that are beneficial to all the individual members of a community, and hence to the community as a whole. Adam Smith

Mixed Economy  The vast majority of countries around the world have some form of mixed economy where some resources are allocated through the price or market mechanism and others are allocated by the state.

Mixed Economy  Canada is a typical example of a mixed economy.  Government role – influence economic activities through taxes, subsidies, laws and regulations.  We also have a private sector where goods and services are allocated on the basis of the market mechanism.

Mixed Economy – Farm Example  Harvest time – traditional  Roads, public school, minimum wage – command  Private property rights, competitive market to sell goods - market