Fundamentals of Microeconomics Economic systems. Economic System ownership of the factors of production; methods to motivate, direct economic.

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Presentation transcript:

Fundamentals of Microeconomics Economic systems

Economic System ownership of the factors of production; methods to motivate, direct economic activity

Market economy Command Economy Mixed Economy

Market economy Private property Freedom of enterprise and choice Self-interest Competition Markets and prices Specialization – Division of labor – Geographic specialization Use of money Active, limited government

Market System Questions What will be produced? – consumer sovereignty – dollar votes How will goods be produced? – technology – resource cost Who gets the output? – willingness to pay How is change accommodated? – self-interest How is progress promoted? – technological advance – capital accumulation

Supply (S) Law of Supply The Supply Curve Market Supply Determinants Changes in S

Market Equilibrium Quantity Efficient Allocation

Market Equilibrium

Government Interventions

Command economy Social (state) property Collective decision making Centralized management (State) by means of planning Monopolized productive processes Redistribution in production and its integral parts (distribution incl.): to be addictive to power means addictive to products Main problem: access to the principle means of distribution Bogdanov A. “Integrated (socialized) natural economy”

Command economy Soviet Union, Eastern Europe, China System was a failure The coordination problem – Set output targets for all goods The incentive problem – No adjustments for shortage or surplus

The market system – Private ownership – Markets The command system – Government ownership – Central planning board

Index of Economic Freedom Ranking of 157 countries for 2008 FreeMostly Free Mostly Unfree Repressed 1- Hong Kong 3- Ireland 5- United States 20- Belgium 31- Spain 48- France 101- Brazil 126- China 134- Russia 148- Venezuela 156- Cuba 157- North Korea

Mixed economy Market mechanism+ State activity Basic Carastristics: -Form of property (state / private property) -Mode of coordination of economic activity (plan / market)

Resource Market Product Market BusinessesHouseholds

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