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Economic Systems

or…

Capitalists do it with an invisible hand…

Chapter 2, Section 1

Today’s thought…

Did you ever think that making a speech on economics is a lot like peeing down your leg? It seems hot to you, but it never does to anyone else.”

- President Lyndon B. Johnson

Introduction

• You probably have set some goals in your life, such as going to college, learning a trade, or opening a business.

• If you were to compare your personal goals to the goals of a North Korean teenager, the lists might vary widely.

Introduction

• One of the reasons for this variance is that each of these persons lives in a community or nation

with a different economic system, or way ofdetermining how to use scarce resources to satisfy people’s wants and needs.• In this section, you’ll learn about the differentkinds of economic systems in the world.

All Societies Must Answer…

The Three Basic Economic Questions

What to produce?How to produce?Who to produce for?

What should be produced? Nations must balance

available resources with desired products/services Will more butter be

produced or more guns? Will we push for medical

improvements or try to prevent deaths from natural disasters?

Do we need to stop making VCRs?

How should it be produced?

How goods and services will be made. What methods will we

use? Will more workers be

hired? Will capital goods be

used instead of hiring more workers?▪ Self-checkout or more

cashiers?

For whom should it be produced?

After goods and services are produced, how will the goods and services be distributed among a society’s members? Prices Government bureaucrats Majority rule Tradition, or religion First-come, first-serve

Apple Produces the iPhone 6

What to produce?How to produce?Who to produce for?

The Apple iPhone 6

Apple decides to hire more tech workers to iron out potential issues before the release…

Who to produce

for?How to

produce?

What to

produce?

The Apple iPhone 6

Apple decides to create the iPhone 6, rather than moving to another line of products (payment system, for example…)

Who to produce

for?How to

produce?

What to

produce?

The Apple iPhone 6

Apple markets the iPhone 6 for a price starting at $199 and up…

Who to produce

for?How to

produce?

What to

produce?

Answering the questions…

How a society answers these three questions is what determines the type of economic system that country has

▪ Often times, WHO answers these questions in a society can tell you a lot about that nation’s economy AND political system…

We can also look at the GOAL(s) of the society to find out their economic system

Who owns the “Means of production”? Non-human capital, technology and

resources

Traditional

GOAL: Survival3 questions answered

by/means of production owned by: Tribe, family, tradition, beliefs Handed down for generations Everyone has a role Not as productive due to lack

of technological advancement and surplus goods

A tribe in the jungle of the Amazon would be an example of this system

Command

Officials consider the needs of the country and allocate resources accordingly

Wants of consumers are rarely considered North Korea and Cuba are examples; Soviet

Union used to be

• GOAL: Equal and Fair Distribution to all

• 3 questions answered by/means of production owned by : Government

GOAL: Efficiency, Free choice, profit 3 questions answered by/means of production

owned by individuals Consumers spend money as they wish, sell their labor Producers decide what goods and services they will offer

Market Economy

• Seeking your own interests benefits others

• “Invisible hand” – consumer demand drives production, creates profits (and losses), improves products, benefits consumers and producers

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Which system is being described?

State planners in country A met to decide what the country should focus on producing. After much deliberation, they decided it would be in the country’s best interest to use their limited resources to produce automobiles instead of other consumer goods, like electronics or textiles.

The state planners passed their decisions down to factories, and allocated to them raw materials, workers, and other resources needed to produce automobiles. Factories were then told how much they should produce with these resources and who the final products should be shipped to.

Which system is being described?

In country B, business owners decide what to produce, how much to produce, and who to produce for. The CEO of Black and Gold Audio, one of the leading audio producers in the country, recently decided to increase production levels of the country’s newest mp3 player, and at the same time decrease production levels of their most popular CD player.

The reason for the emphasis on mp3 players is that demand for CD players has decreased dramatically as mp3 technology has taken over the market. Simply put, there is more profit to be made in the mp3 market.

Which system is being described?

In country C, people rarely engage in market transactions. For the most part, they don’t need to. Families grow their own vegetables and raise their own animals or hunt to get meat.

Certain times get tough for people in country C, like when the winters are especially cold or animals change their migration patterns.

For this reason, it is important that families stock up in “good times” and develop relationships with neighbors with whom they can share or trade.

Which system is being described?

In country D, business owners make most economic decisions. As long as they abide by fair trade policies, they can decide what to produce, how to produce and for whom to produce without government intervention.

These decisions are made by business owners depending on what happens in the market.

For example, a computer manufacturer recently developed a new gaming system, but decided to wait until closer to the holidays to release this system to the public because it believed that anticipation among consumers would allow the company to charge a higher price for the system.