Economic Systems Traditional Economy We Need A System • We know the there are limited resources and everybody needs to deal with the problem of scarcity. • So what kind of systems have we developed to deal with this? Traditional Economy Traditional Economy • Overall goal is survival • It is about the group, what the individual wants is really not important. Advantages of a Traditional Economy • Everyone knows their role. • Life is generally predictable and stable. • Almost everyone is taken care of, provided you are doing your part. Disadvantages of a Traditional Economy • This system resists change. It has been the same for thousands of years. • This lack of progress leads to a lower standard of living. Command Economy Command Economy • Government decides what goods and services are produced. • Individual consumers are not considered • It is what the government thinks you need Advantages In A Command Economy • Everybody has a job. • The Economy can change direction quickly. Disadvantages In A Command Economy • This system in not designed to meet the “wants” of consumers. • The basic incentive of this system is to do just enough to meet quotas. Market Economy Market Economy • It is all about the consumer and individual choice • As a consumer you make decisions based on you own economic interests. Advantages of a Market Economy • High degree of individual freedom • Relatively small degree of government interference (Mixed Economy) • Seemingly unlimited variety of goods and services available to the consumers. Disadvantages of a Market Economy • The government does not provide for the basic needs of everyone. • The government does not provide certain services that people value. Which Economic System Are We? • Mixed Economy • Capitalism • Based on 4 Important Principles - Private Property - Freedom of Choice - Profit - Competition Fundamentals of a Market Economy • Private property rights - rights of individuals and groups to own property. • Market – any place or situation in which people buy and sell resources and goods and services. • Property rights are enforced by law • Would this system work if buyers could not trust sellers? Limited Government • Laissez faire – French term meaning “leave things along”. • Should the government leave the markets alone? • How does the government protect people from the market? Voluntary Exchange • Two parties involved make an exchange usually a good or service for money. • This is guided by self interest Consumer has the power • A consumer can buy whatever they want. • This creates competition within a market • Self Interest – Both the buyer and seller use self interest to get what they want. Specialization • People do what they do best • A teacher can make money by teaching but how can he or she get groceries for the week. • Instead of growing them we go to the store with money earned by teaching and buy groceries. Circular Flow Model • This shows how households and business meet in a market economy. Product Market • Market for goods and services • The suppliers of this market are businesses • The goods are sold for money (profit) which keep the businesses going Factor Market • This market is where businesses go to get things for production • This means the factors of production. We are included in this. We are the laborers, land owners, owners of capital. • We get income for doing this • Firms get resources from the product market which are used to produce goods. Mixed Economy • Most common economic system in the world. • It has elements of all three systems • In a mixed economy one of the three systems dominates and is the most prevalent in that economy. • The U.S. is a mixed economy, which of the three systems does the U.S. use the most? • • • • How does the U.S. use each system? Traditional Command Market The free market has led to some interesting products! What about other countries? What’s the debate about Socialism? Sweden • • • • • • • • Government pays for… Child care ages 1-5 School ages 6-16 More schooling and college if you want to go Health care Dental Pensions Time off for raising a family Sweden • How do they pay for this? • Citizens in Sweden pay about 60% of their income in taxes. Politics of A Market Economy • Politicians need your vote • An almost endless amount of research goes into how people are likely to vote based on who they are, and how they live. • If the researchers do their job correctly they will know who you will vote for before you enter the booth.