Economic Systems
Standards
• Standard 3: Will students will understand that:
Different methods can be used to allocate
goods and services. People, acting individually
or collectively through government, must
choose which methods to use to allocate
different kinds of goods and services
• Standard 4: Students will understand that:
people respond predictably to positive and
negative incentives
Economic Questions
Chap 2.1
What does that mean?
• Over the course of the past 1,000 years various
models have been designed to make a national
economy more efficient. The number one goal of
nearly all economies is full employment.
• The Russians adopted a Communist system, while the
United States adopted a capitalist system – both have
good and bad aspects
• Entities will act in a predictable fashion is they are
either rewarded ie. Money or punished ie. Imprisoned
• Incentives are the best way to get a result! – think
extra credit
Political Systems
• Over the course of time different systems have
evolved to deal with the issue of scarcity
• The system a country adopts depends on the
goals of the country
• Every 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
• Socialism: a social and political philosophy that
wealth should be equally distributed
• Socialism requires central planning
• In socialist countries the government owns
major industries ie. Trains
• Socialist countries could have democracy
• Communism: all economic power is in the
hands of the government
• Communist countries cannot allow democracy
• True Communism has never existed!
Goals of Society
• Economic Efficiency – most societies try to
maximize the return on their resources
• Economic Freedom – different economic
systems allow different degrees of economic
freedom
• Economic Security and Predictability – people
want to know that their government will work for
them and protect them – safety net
• Economic Equity – who gets what? Do the
unemployed deserve the same as the
employed. Should teachers be paid more or
less?
• Economic Growth and Innovation – only when
the economy grows will the standard of living
improve. Innovations improve efficiency. Think
internet
• Other possible goals – the environment, full
employment, healthcare
Economic Systems
• 1. 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
Economic Systems
• 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
• * China is a transition economy because the
country is politically Communist, but some
aspects of the economy are becoming more
free market
Economic Systems
• 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
Economic Systems
• 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
Examining Issues
• In 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 Free market
Chap 2.2
The Free Market
• A market is a place where buyers and sellers
meet ie. Farmer’s market, stockmarket,
Starbucks
• They exist because we need to trade – we
exchange what we have for what we want
• Most people specialize in one skill or trade
• Specialization is the most efficient use of
resources
• Wages (money) is a medium of exchange for
other goods and services; hence the need for
markets
• Firms purchase the factors of production from
the people and then pay them wages for their
labor – this is the factor market
• People purchase goods and services that firms
provide – this is the product market
• A successful company sells the right product at
the right price
• Too expensive or too cheap and the company
will go out of business - $100 pencil
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Adam Smith was an British free market philosopher
He wrote The Wealth of Nations
Claimed self-interest is the greatest motivation
According to Adam Smith, it is competition that keeps
the marketplace functioning
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Consumers will look for the lowest price
Lower prices are incentives
Producers will look to make the greatest profit
Competition amongst consumers regulates the freemarket
• Incentives can be monetary or rewards
• Smith said the invisible hand will regulate the markets
• Transfer payments can be made by governments or
businesses for no service ie. Food stamps, social
security, even stimulus checks
Advantages of the Free Market
• Economic Efficiency – self-regulating markets
can respond quickly to changes or fads ie.
Cabbage patch dolls, Boot Camps, Pokieman
• Economic Freedom – free markets have the
greatest degree of economic freedom
• Economic Growth – competition encourages
growth. Entrepreneurs are always seeking an
advantage
• Additional Goals – free markets offer more
choices determined by the consumer –
consumer sovereignty
• BUT creates winners and losers!
Centrally Planned Economy
Chap 2.3
Centrally Planned Economy
• The government tells firms what to produce and
how much
• The government owns the land, capital, and
tells the labor where to work
• There is no competition
• There is no consumer sovereignty
Disadvantages of Centrally Planned
Economy
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Guaranteed jobs removed incentives
Workmanship was poor
There was no place for innovation
Individual freedoms were sacrificed for societal
goals
• Ultimately most planned economies failed
Modern Economies
Chap 2.4
Mixed Economy
• Most countries have a mixed economy – to
some degree
• However, government involvement has
increased because problems have become
greater ie. Banking collapse
• In America, private property is very important
• Society 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?
Circular Flow Model of a Mixed Economy
• 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.