Economic Systems

Scarcity Means There Is Not Enough For Everyone

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

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The 3 Major Production Questions

What to produce?How to produce?For whom to produce?

We will classify economic systems into categories, based on how each of them attempts to answer these three questions.

Traditional Economy

The answers to the three major production questions are dictated by ritual, habit, or custom.

Examples of Traditional Economies

Inuit tribeSome parts of South AmericaSome parts of AfricaAboriginal tribes of AustraliaSome island societies

Traditional Economies

Advantages? Disadvantages?

Command Economy

The answers to the three major production questions are given by some strong central authority (i.e. the government)

Public ownership of resources

Communism – an economic system in which all factors of production are the property of the state.

Examples of Command Economies

Cuba

Examples of Command Economies

North Korea

Command Economies

Strengths Weaknesses

Market Economy

Businesses and individuals act in their own best interest to answer the three major production questions.

Private ownership of resources

Capitalism – an economic system in which individuals and businesses compete, with a minimum of government interference

“Laissez-Faire”

Market Economies

Strengths Weaknesses

Mixed Economies

Mixed-MarketSocialismEconomies in Transition

Total Government

Control

No Government

Control

Communism Socialism Mixed-Market Capitalism

Little Economic Freedom

Total Economic Freedom

Rank Country Overall Change

1 Hong Kong 90.0 +0.3

2 Singapore 87.1 -0.2

3 Australia 82.6 +0.4

4 Ireland 82.2 -0.3

5 New Zealand 82.0 +1.2

6 United States 80.7 -0.3

7 Canada 80.5 +0.3

8 Denmark 80.0 +0.4

9 Switzerland 79.4 -0.1

10 United Kingdom 79.0 -0.5

2009 Index of Economic Freedom:

http://www.heritage.org/Index/

The Top 10

2014 Index of Economic Freedom:

Bottom 7

Role Players in the Mixed-Market Economy

ConsumersProducersGovernment

Consumer Producer Protector Regulator Provider

7 Economic & Social Goals of Capitalism

1. Economic Freedom2. Economic Equality3. Economic Security4. Economic Growth5. Economic Efficiency6. Price Stability7. Full Employment

Capitalism Communism

CapitalismCapitalism CommunismCommunism

Characteristic Capitalism Communism

Primary Economic Goal

Basis of Economy

Resource Allocation

Government Planning

Ownership of F.O.P.

Motivation

Economic Freedom

Economic Equality

CompetitionCooperation /

Collectivization

Supply & Demand

Government Planning

Private Property Public Property

Profit MotivePatriotism: The

Good of Community

““From each From each according to his according to his ability, ability, to each to each according to his according to his needs!needs!” ”

Karl Marx•Critique of the Gotha Programme, 1875

Communism

Communism: How/Why does it rise?How/Why does it fall?

Why Doesn’t It Work?

Incentive Problem Average Test Scores Example

Coordination ProblemIn one word, why doesn’t it work?

GREED

“As for me, I am not a Marxist.”

Karl Marx

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When CAN It Work?

Characteristics of Free Enterprise Capitalism

Economic FreedomVoluntary Exchange

Consumer Sovereignty: The consumer drives the market – DOLLAR VOTES

“The customer is always right!”Private Property Rights

The Tragedy of the CommonsProfit Motive/Self-interestCompetition

Markets and Prices Specialization/Division of Labor

Market System Questions

What will be produced?consumer sovereigntydollar votes

How will goods be produced?technologyresource cost

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Market System Questions

Who gets the output?willingness to pay

How is change accommodated?self-interest

How is progress promoted?technological advancecapital accumulation

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Adam Smith

“Wealth of Nations” 1776

Invisible hand Meat Bread Candles How do we decide to provide these?

The Invisible Hand

Virtues of the market systemEfficiencyIncentivesFreedom

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