2 Political SystemsOver the course of time different systems have evolved to deal with the issue of scarcityThe system a country adopts depends on the goals of the countryEvery society has to answer these questions: a) What goods and services will be produced? b) How will they be produced? c) Who consumes the goods and services?These questions create dilemmas defense or education welfare or consumer goods guns and butter
3 Goals of SocietyEconomic Efficiency – most societies try to maximize the return on their resourcesEconomic Freedom – different economic systems allow different degrees of economic freedomEconomic Security and Predictability – people want to know that their government will work for them and protect them – safety netEconomic Equity – who gets what? Do the unemployed deserve the same as the employed. Should teachers be paid more or less?
4 Economic Growth and Innovation – only when the economy grows will the standard of living improve. Innovations improve efficiency. Think internetOther possible goals – the environment, full employment, healthcare
5 Economic Systems1. Traditional Economies – relies on customs, habits, and traditions. a) little change or innovation b) work usually along gender lines c) usually small, close-knit communities d) usually hunter-gatherer societies e) generally a low standard of living f) examples include: almost every African country, Burma, Bangladesh
6 2. Command Economies – only the central government decides economic decisions a) also called command economies b) main goal is to look after the people c) no competition d) examples include: Cuba, China, North Korea
7 3. Mixed Economies – market-based system with government playing a limited role a) most modern economies are mixed b) government controls fiscal and monetary policies c) the accumulation of capital is the main goal d) examples include: Italy, France, Spain
8 4. Market Economies – economic decisions are made by individuals, based on exchange a) laissez-faire - advocated by Adam Smith b) also called capitalism or free market c) is very competitive d) examples include: United States, Canada, Great Britain
9 Examining IssuesIn America, economics controls politics Republicans – individuals should take care of themselves with very limited help from the government Democrats – the government should take care of the society (socialism)The bailouts – at least $8.5 TRILLION and growing
11 The Free Market Markets are everywhere A market is a place where buyers and sellers meet ie. Farmer’s market, stockmarket, StarbucksThey exist because we need to trade – we exchange what we have for what we wantMost people specialize in one skill or tradeSpecialization is the most efficient use of resourcesWages (money) is a medium of exchange for other goods and services; hence the need for markets
13 Firms purchase the factors of production from the people and then pay them wages for their labor – this is the factor marketPeople purchase goods and services that firms provide – this is the product marketA successful company sells the right product at the right priceToo expensive or too cheap and the company will go out of business - $100 pencilAccording to Adam Smith, it is competition that keeps the marketplace functioning
14 Smith wrote The Wealth of Nations and claimed self-interest is the greatest motivation Consumers will look for the lowest priceLower prices are incentivesProducers will look to make the greatest profitCompetition amongst consumers regulates the free-marketIncentives can be monetary or rewardsSmith said the invisible hand will regulate the marketsTransfer payments can be made by governments or businesses for no service ie. Food stamps, social security, even stimulus checks
15 Advantages of the Free Market Economic Efficiency – self-regulating markets can respond quickly to changes or fads ie. Cabbage patch dolls, Boot Camps, PokiemanEconomic Freedom – free markets have the greatest degree of economic freedomEconomic Growth – competition encourages growth. Entrepreneurs are always seeking an advantageAdditional Goals – free markets offer more choices determined by the consumer – consumer sovereignty
17 Centrally Planned Economy The government tells firms what to produce and how muchThe government owns the land, capital, and tells the labor where to workThere is no competitionThere is no consumer sovereignty
18 Socialism: a social and political philosophy that wealth should be equally distributed Socialism requires central planningIn socialist countries the government owns major industries ie. TrainsSocialist countries could have democracyCommunism: all economic power is in the hands of the governmentThey believe in the need for a violent revolutionCommunist countries cannot allow democracyTrue Communism has never existed!
19 Soviet Union Created in 1917 under Lenin, a socialist Central planning was introduced in 1920 and lasted until 1991Soviet planners allocated scarce resources to the military and the Space RaceThe government created large state-owned farms called collectivesThe government monitored outputSoviet planners favored heavy industry, the military, and the Space RaceConsumer goods became the opportunity costs
20 Producers focused on quantity, not quality There was no incentiveFood, accommodation, luxury items were scarce – but available on the blackmarket
21 Disadvantages of Centrally Planned Economy Guaranteed jobs removed incentivesWorkmanship was poorStalin’s Five-year Plans had success in industry but were a disaster in agriculture – why?There was no place for innovationIndividual freedoms were sacrificed for societal goalsUltimately most planned economies failed
23 Mixed Economy Most countries have a mixed economy – to some degree However, government involvement has increased because problems have become greater ie. Banking collapseIn America, private property is very importantSociety has to prioritize its economic goals and opportunity costs: Should taxes pay for the military? Should the unemployed receive benefits? What should the minimum wage be?
25 United StatesThe United States has a free market economy, but there is government involvementLaws protect private property and the rule of lawThe government tries to act as a referee with few regulationsForeign investment is encouraged and protected
27 Globalization is the integration of national economies of the world that we may be witnessing operation of a single worldwide economy.Benefits include: A) Expanded trade with new people and products. B) Income per person has increased in countries that have opened up their economies to globalization. C) Developing countries have seen the benefit of reduced hunger and child labor. D) Increased life expectancy.27