Economic Systems

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Scarcity Means There Is Not Enough For Everyone

Government must step in to help allocate (distribute) resources 2

The 3 Economic Questions

Every society must answer 3 questions:1.What goods and services should be produced? 2.How should these goods and services be produced? 3.Who consumes these goods and services?

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• The way these questions are answered determines the economic system

• Economic system- the method used by a society to produce and distribute goods and services

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Traditional Economies

• Most of our actions come from habit & custom

• Why do Americans eat Turkey on Thanksgiving? Why do we leave tips in restaurants?

• These practices have become American culture

• In societies with a traditional economy, the allocation of scarce resources, & all other economic activity, stems from ritual, habit, or custom

• Habit & custom dictate most social behavior• Roles are defined in society by customs of their

elders & ancestors• Ex: Central African villages, Australian Aborigines,

ancient Native American communities

Advantages (know 1)•People know which role they play•Little uncertainty over WHAT, HOW, & for WHOM to produce•Tradition dictates how people live their lives

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Disadvantages (know 1)•Discourages new ideas & new ways of doing things•Strict roles may punish people who act differently or break rules•Lack of progress may lead to a lower standard of living…or death!

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Command Economy• AKA

Communism/Socialism• Economic decisions made

by the government: people have little, if any, influence over how the basic economic questions are answered

Ex (know 1)• North Korea, Cuba, China,

Saudi Arabia

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Advantages (know 2)•Low unemployment-everyone has a job•Great Job Security-the government doesn’t go out of business•Equal incomes means no extremely poor people•Free Health Care

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Disadvantages (know 2)

•No incentive to work harder•No incentive to innovate or be creative•No Competition keeps quality of goods poor•Corrupt leaders•Few individual freedoms

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• Why has Communism/Socialism failed?

• If consumers want computers and only one company is making them…

• Other businesses CAN’T start making computers

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• NO COMPETITION = higher prices, lower quality, & less product variety

• More computers wont be made until the govt creates a new factory

• End Result: A shortage of goods consumers want, produced at the highest prices and the lowest quality

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Market Economies• AKA Capitalism• Little government involvement

in the economy (Laissez Faire = Let it be)

• Supply, demand, & the price system help people make decisions & allocate resources

• People & businesses act in their best interest to answer WHAT, HOW, & FOR WHOM questions

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• A market is just an arrangement where buyers & sellers can exchange goods (could be anywhere)

• People’s decisions act as votes• What people buy w/ dollars is a vote for that

product• These “votes” let producers know what people

want

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• How the free market regulates itself:

• If consumers want computers and only one company is making them…

• Other businesses have the INCENTIVE to start making computers to earn PROFIT

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• =COMPETITION = lower prices, better quality, & more product variety

• We produce the goods and services that society wants, “resources follow profits”

• The End Result: Most efficient production of the goods consumers want, with the lowest prices and the highest quality

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•Society’s goals will be met as individuals seek their own self-interest•Ex: Society wants fuel efficient cars…•Profit seeking producers will make more•Competition between firms = low prices, high quality, and greater efficiency •The govt doesn’t need to get involved, since the needs of society are met

•Competition and self-interest act as an invisible hand that regulates the free market

Invisible Hand Theory

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• Companies are greedy • Companies must satisfy the

needs of consumers,• If not they go out of business• Companies to outsource US

jobs overseas, because they want more profit

Attacks Against Capitalism

• Only helps the rich• US companies put

workers in sweatshops

• Sweatshop workers are not forced labor

• They work there voluntarily

• Working conditions are far below US standards, but it’s better than the alternative

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"

My concern is not that there are too many sweatshops, but that there are too few." -Jeffrey

Sachs, Harvard University

• Question: Who is to blame for these people being so poor?

• Answer: Low productivity• If a country produces little, it can’t afford to pay it’s

workers very much • Why do these countries have such low

productivity?• Corrupt governments, inadequate physical capital

& infrastructure, & underdeveloped human capital• What does foreign investment bring to poor

countries?