Economic Systems

There’s a problem… We all have wants. – Food – Cell phones – Good education – Crocs – Selfie sticks – Fashionable tape dispensers But you can’t always get what you want.

Problem: Economic Scarcity There’s not an infinite amount of resources – Raw materials – Workers – Time We have to make CHOICES

Three Basic Economic Questions What will we make? How will we make it? Who gets it? 1 2 3

Two Modern Approaches Market EconomiesPlanned Economies

Who Owns the Factors of Production? LandLaborCapitalEntrepreneurship

Planned Economy: Communism “The theory of communism may be summed up in the single sentence: abolition of private property.”

Planned Economy: Communism True communism a classless society Everyone owns the factors of production Everything distributed equally – No competition

1.Produce needs, not wants 2.Make needs as close to free as possible 3.Treat workers better (safe, high wages, benefits) 4.No private property 5.Economic equality 6.Central planning of production 7.No entrepreneurs Communist Philosophy

Greater income equality Full employment Fewer economic recessions Production of goods and services is planned to meet society’s needs Consumers receive basic necessities Advantages of Communism

Lack of incentive Low quality goods and services Lower standards of living Slow or stagnant economic growth Lack of technological progress Bureaucracies (planning creates inflexibility) Black markets Loss of individuality Inefficient and widespread waste of resources Disadvantages of Communism

Examples of Communism China, Cuba, & the former Soviet Union… …except not really. No country has ever TRULY been communist

Planned Economy: Socialism Some private property & some public ownership in control of industry Goal is to set collective objectives & provide equal access to resources – Education – Healthcare

Socialist Philosophy Socialism = many economic rules (fewer rights) Price controls High taxes Cheap or “free” healthcare, education Safety for workers Democratic

Planned Economies “In both communism and socialism, there is economic planning, and the government, usually in the form of some bureaucratic agency, helps decide what to produce, how to produce it, and who gets it.”

Planned Economies If gov’t is completely in control of economy, it is a command economy – Even decides # of shoes to be produced!

Market Economies Also called capitalist economies Individuals own factors of production – Gov’t stays out Gov’t has a laissez- faire approach to production, commerce, & trade

Market Economies Businesses make things, not to do good for mankind, but to make dat $$ MoNeY $$ Since consumers get to choose, producers need to make product with the right features at the right price – “Invisible Hand” of economy

Example: Cars If consumers prefer one company’s car, that business will profit more & have incentive to produce more cars Car companies that don’t will disappear

Market Economies Scarce resources will go to most desired use & will be used efficiently If a business is wasteful & inefficient or makes something no one wants, another business will make a similar product better and/or cheaper

But if the Government Was in Charge Wouldn’t be able to quickly respond to changes in tastes & preferences Efficiency would suffer

The Invisible Hand Businesses & individuals meet society’s needs when they seek own self-interest Competitive markets w/ profit-seeking businesses have incentive to produce high-quality products as efficiently as possible

Planned Economy: Communism “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self interest.”

Efficient use of factors of production Faster economic growth High-quality goods and services Higher standards of living Advantages of Capitalism

Greater unemployment Frequent economic recessions Greater income inequality Greater economic insecurity Disadvantages of Capitalism

Why Does Government Ever Intervene? So if markets are soooo perfect,

What Free Markets Won’t Do… Maintain rule of law – Law, police, courts, etc. Provide public services – Roads, bridges, education, defense Little profit in these areas, so gov’t must step in

Mixed Economies “Modern economies are neither completely free market nor planned. There’s a spectrum of government involvement.

Mixed Economies Most modern economies have free markets AND gov’t intervention Can be explained by the circular flow model

The Circular Flow Model Two key players in modern economies: households & businesses

The Circular Flow Model Businesses sell goods & services to household. In order to buy goods & services, households sell resources (labor) to businesses.

The Circular Flow Model

My Pizzeria How would my pizzeria function under different economic systems?

My Pizzeria in a Free Market I answer the basic economic questions! I determine how much cheese and pepperoni goes on the pizza I determine the quality of the cheese and pepperoni I set my employees wages I set my business hours

My Pizzeria in a Command Economy The government answers the basic economic questions The government sets the amount of cheese and pepperoni on each pizza The government determines quality of cheese and pepperoni The government sets employees wages The government sets business hours Problem: What does the government know about pizza?

My Pizzeria in a Mixed Economy The Government and I both answer the basic economic questions I determine the amount of cheese and pepperoni on the pizzas; government determines the quality of cheese and pizza I set employee wages; government sets minimum wage for employees I determine business hours; government determines whether I am safe to be open or not

A Range of Economic systems Depends on Economic Rights Free Market MixedCommand Hong Kong Dubai Singapore Germany France Sweden USSR Cuba North Korea UK Canada Peru South Africa China Greece