There are three fundamental questions of economics: 1. WHAT is produced? 2. HOW is it produced? 3. WHO consumes what is produced?

Transcription

1 Economic Systems

2 There are three fundamental questions of economics: 1. WHAT is produced? 2. HOW is it produced? 3. WHO consumes what is produced?

3 WHAT is produced? If resources are limited Should a local government use resourced to build a new school, repair an old highway, or construct a new recreation center? Should American producers use resources to make goods for national defense or to provide services for retired people who are too old or ill to work? Should a farmer grow wheat, cotton, or lettuce?

4 HOW is it produced? How should we obtain crude oil to meet our energy needs? How much pollution should we allow firms to generate when producing goods? How should hogs be raised before they become food?

5 WHO consumes what is produced? Who should receive the limited supply of flu vaccinations? Who should benefit from the construction of a new school? Who should a shoe manufacturer market their product toward?

6 Who decides how to answer these questions? In the United States, consumers (people), producers (businesses), and governments (local, state, and federal) all have input. However, not all economic systems are alike in that respect.

7 So what is an economic system? economic system - a particular set of social institutions which deals with the production, distribution, and consumption of goods and services in a particular society.

8 So what is an economic system? All societies face the same fundamental questions of economics, but societies answer these questions in different ways. The way these questions are answered determines the the type of economic system of that society.

9 There are four basic economic systems: Traditional Command Market Mixed

10 Traditional Economy Key image: The Village Market The Bush Market by Anju Walters

11 Traditional Economy This is the oldest economic system. Tradition and custom govern economic decisions.

12 Traditional Economy Economic activities are usually centered toward the family, tribe, or ethnic group. Barter (trading one thing for another) is often used in place of currency (money).

13 Traditional Economy Farming, hunting, and gathering are done largely in the same fashion as the generation before.

14 Traditional Economy There is little to no use of technology.

15 Traditional Economy Choices are determined largely by environmental factors.

16 Traditional Economy Resources are often allocated based on inheritance.

17 Traditional Economy Advantages: Little friction among members because there is little competition Individual roles are clearly defined System is generally wellunderstood by participants Disadvantages: Does not allow for growth and development Changes are slow There is little social mobility (your role is determined by birth Does not take advantage of technology Individuals often have no control over environmental factors

18 Market Economy Key Image: Kid in a Superduper market Key terms: Competition Individual Choice

19 Market Economy - Healthy Competition Profit is the primary objective of production. Competition determines price and increases the quality of products.

20 Market Economy - Healthy Competition

21 Market Economy - Healthy Competition The absence of competition is an economic system is called a monopoly. Because monopolies leave consumers with no choice, monopolies typically lead to higher prices and lower quality.

22 Market Economy - It s all about the INDIVIDUAL Economic decisions are made by INDIVIDUALS competing to earn profits based on supply and demand.

23 Market Economy - It s all about the INDIVIDUAL Resources are owned by INDIVIDUALS.

24 Market Economy - It s all about the INDIVIDUAL INDIVIDUAL freedom is considered very important; individuals have freedom to make economic decisions.

25 Market Economy - It s all about the INDIVIDUAL INDIVIDUALS can choose between a variety of products and producers.

26 Market Economy - Pros and Cons Advantages: Prices are determined by market forces (supply and demand); competition brings down prices. Consumers can buy whatever they like in whatever quantities they like. There is a great variety of goods and services. Little government intervention. Adjusts to change easily.

27 Market Economy - Pros and Cons Disadvantages: It does not always provide the basic needs of everyone in society, which can lead some people to slip into poverty. It may make it difficult for government to provide adequate social services. There are occasional market fluctuations and even failures. People can make choices which are harmful to themselves and others.

28 Command Economy Key Image: Minions at work Key Terms: Collective Government Quota

29 Command Economy - We re all in this together. The focus is on the collective (the good of society as a whole, or the greatest good for the greatest number). Individual freedom is not as important and individuals have little, if any, influence over economic functions.

30 Command Economy - We re all in this together. There is no competition; the purpose of business is to provide goods and services, not to make a profit.

31 Command Economy - We re all in this together. Factories are concerned with quotas official limits on the number or amount of people or things that are allowed.

32 Command Economy - Who s in Charge? Resources are owned by the government. The government (or other central authority) makes all economic decisions. The government sets the prices of goods and services.

33 Command Economy - Advantages It can ensure stability because it does not coincide with business cycles. It focuses on equality, serving people collectively instead of as individuals and distributing wealth among all in society. The products produced fulfill needs; there is little waste or excess.

34 Command Economy - Disadvantages Often there is insufficient resource distribution, i.e. shortages and/or surpluses. It cannot determine society s objectives and consumer s preferences as well as a Market Economy can. It cannot easily adjust to change.

35 Command Economy - Disadvantages It infringes on personal freedoms. Consumers have few, if any, choices in the marketplace. There are few, if any, incentives for innovation. It often leads to corruption among state planners.

36 Mixed Economy Key Image: Liger The Mixed Economy is a hybrid blend of economic systems.

37 Mixed Economy Combines elements of pure market and command economies; Government and individuals share the economic decision making process.

38 Mixed Economies The government guides and regulates production of goods and services.

39 Mixed Economies The government guides and regulates production of goods and services.

40 Mixed Economies The government guides and regulates production of goods and services.

41 Mixed Economy Resources are owned by individuals.

42 Mixed Economy Government serves to protect both producers and consumers from unfair policies and practices.

43 Mixed Economy - Pros and Cons Advantages: It has some advantages of both the Market and Command systems. It can focus on social welfare and political freedom as well as individual liberties.

44 Mixed Economy - Pros and Cons Disadvantages: It has many of the same disadvantages of both the Market and Command systems. It may not lead to an optimal use of resources. Government intervention can hinder progress.