Economic Systems and Economic Tools

All economic systems produce two things, these are:

• Economic Goods – These have value and can be seen

• Economic Services – Have value but cannot be shown

Factors of Production• In order to produce goods

and services an economic system will utilize the factors of production which is sometimes call productive resources.

• These are the basic resources needed to produce economic goods and services. There are three:

A. Natural ResourcesFactors of Production

B. Capital GoodsFactors of Production

C. LaborFactors of Production

Entrepreneur• Sometimes what is

referred to as the unofficial fourth factor of production is the entrepreneur. These individuals bring together the 3 factors of production to seek financial gain through profit or accept the losses. Richard Charles Nicholas Branson (born 18 July 1950) is an English industrialist, best known for his Virgin brand of over 360

companies. Branson's first successful business venture was at age 16, when he published a magazine called Student.[1] He then set up an audio record mail-order business in 1970. In 1972, he opened a chain of record stores, Virgin Records, later known as Virgin Megastores and rebranded after a management buyout as Zavvi in late 2007.With his flamboyant and competitive style, Branson's Virgin brand grew rapidly during the 1980s—as he set up Virgin Atlantic Airways and expanded the Virgin Records music label. Richard Branson is the 261st richest person according to Forbes' 2009 list of billionaires, with an estimated net worth of approximately £1.5 billion (US$2.5 billion).[2]

• When the factors are brought together to make economic goods they can produce two types, consumer goods which are sold to consumers for personal use and public goods which are for our collective benefit.

Three Basic Economic QuestionsEvery nation must ask itself:

• What must be produced

• How will it be produced

• For whom will it be produced

Economic Systems• Now that we have the

three basic questions we can now relate them to the type of systems that different economies utilize. Keep in mind that in today’s world a pure economy is rare and the most realistic model is a mixed economy

Traditional Economy

• An economy in which the basic economic questions are answered by the people with the answer being usually based on how things were done in the past.

Brac maritime tradition dates quite late - in 18th

century it became one of the main source of income.

Bol, Croatia

Trough the history, main occupation of Brac inhabitants was cattling. Even

today, you will enjoy the taste of traditional specialty - lamb.

Few centuries after arrival of Croatians on Brac started the development of

agriculture and fishing.

Command Economies (Centrally Planned)

Preface30 minute Video9 minute Video

Berlin-Center of the Cold War

• In April of 1945 the city was devastated by the last battle of WW2

• Germany sued for peace and the city was divided into four zones in 1945

Berlin is divided

• In the summer of 1945 the city was host to four occupiers, the Russians took the eastern half of the city while England, France and the United States occupied the western zones

Civilians try to subsist in the ruins of the city.

Life returns slowly to Berlin in the summer of 45

Division of Berlin

• The Soviets try to eject the allies in May1948 by stopping all supplies coming into Berlin

• Life in Berlin in the winter of 48/49 was rough as supplies were scarce.

• Berliners pitched in at airbases to provide the labor needed to empty the aircraft

• By the spring things were getting better as the allies were dropping 4,000 tons of food and supplies daily

An uneasy tension in the 1950’s

• In 1949 the Soviets lifted the blockade when it was decided that the allies would not abandon Berlin

• Throughout the 50’s and uneasy acceptance by both sides allowed life to proceed somewhat normally

West Berlin Rebuilds

Berlin in the 60’s

East Berlin in the 60’s

The Trabant

The environmentally friendly version of the Trabby

The updated and restored Trabant today

The Trabant..Not just for Commies anymore

East Berlin rebuilds at a slower pace than West Berlin inspiring envy and Soviet anger. The Adlon Hotel in East Berlin was still repairing bomb damage from 1944 in 1954.

1961-1989 East Germany creates a prison state when they put up the first barbed wire barricades around Berlin and along the border with West Germany. The first wire is erected August 13th, the Brandenburg Gate is closed on the 14th and

West Berliners are barred from East Germany for two years

August 12/13, 1961 In the afternoon of August 12 at 4 p.m. Walter Ulbricht, the East German leader, signed the commands to close the border. Next Sunday at midnight the army, police and the "Kampfgruppen" began to bolt the city. The wall is built and separates the city into two parts for more than 28 years.Streets, the railway and the S-Bahn (city railway) are broken, stations of the U-Bahn (underground railway) are closed, even cemeteries are not spared. Nothing is forgotten and the East Germans will not be allowed to free travel to the West until 1989.

Conrad Schuman, a border guard escapes from East Germany in August 1961

1st Generation Berlin Wall

The World is shocked at the construction of “Die Mauer”

Checkpoint Charlie 1961

To prevent people from jumping into the West the windows are

blocked up.

A view of the second generation Berlin wall at the Potsdammer Platz. Note the observation platform erected by the West

German government.

The first fatality at the wall was Peter Fecther, an 18 year old boy. On August 17th 1962 Peter and a friend Helmut Kubeik

jumped from a building window and sprinted to the wall. The guards fired 21 times cutting Fecther down with shots to his

abdomen and spine. Paralyzed, Fecther called out for help for fifty minutes as hundreds of shocked West Berliners helplessly

looked on.

Other views of Fechter’s death

A Monument to Peter Fechter

2nd Generation Wall

3rd Generation Berlin Wall

4th Generation Wall

From the year 1975 the third generation of Berlin Wall was replaced by the fourth generation. New concrete segments were used which were easy to build up and more resistant to breakthroughs and to environmental pollutions.This kind of Berlin Wall was also called "Grenzmauer 75" (Border Wall 75).

The Border Guard OathI swear:

To faithfully serve the German Democratic Republic, my Fatherland, and the orders of the Farmers-Workers Government and to protect it against every enemy.

I swear:To be at the side of the National Volks Armee and the

other Protective and Security organizations of the German Democratic Republic, as well as the armies and Border Troops of the Soviet Union and the other allied

socialist countries, and as a soldier of the Border Troops to be prepared at all times, firm, and courageous and to

protect with my life the borders of my socialist Fatherland against all enemies.

I swear:To be a honest, brave, disciplined, and watchful soldier,

and to follow the orders of military superiors with absolute obedience, and to strictly protect military and

national secrets. I swear:

To acquire military skills, to comply with military regulations, and to maintain the honor of the Republic

and its Border Troops. I swear:

Should I ever violate the solemn oath, then may I meet the harshest penalties of the laws of our republic and the

wrath of the people. .

Border Guards with Ceremonial Flag

A recent escaped border guard poses next to a beaming West German Customs official. Photo - Zoll Luebeck

5,500 border guards were arrested for attempted escape

They served an average prison sentence of five years

27 border guards killed trying to escape

Other measures to prevent escapes by border guards

• Intense political indoctrination • Friends and room mates avoided

for patrol duty • Guards always paired • Debriefings after leave to identify

possible "home strife" • Monthly "personnel review" of

border guards • Shoot to kill without warning for

escaping guards • Mail & telephone calls monitored • No contact with Westerners • Reassignment away from the

border area • Informers

The End of the Wall

November 9, 1989 A press conference is held where the SED government announced that travel restrictions for East Germans had been lifted. In that night people from East Berlin flooded into the western part of the city and hundreds of thousands celebrated throughout the city. Next day Berliners begin to discover the other part of their city.

171 people were killed or died attempting to escape at the Berlin Wall between August 13, 1961 and November 9, 1989.

Relics of the past today

Memorial for Gunter Litfin


• While the laws of demand and supply dictate what and how much of certain goods our economy produces, this type of economy has to artificially approximate this.

• Also, because the government owns all the factors of production it decides the answers to the three basic economic questions.

• It has been noted that these types of systems suffer from five flaws, these are:


• Consumers get low priority often resulting in shortages or long waits for goods.

• Due to the lack of competition there are limited varieties of products. Also the government might even decide what you will wear and where you will live.

• Central planning can be inefficient resulting in limited or lost production.


• State property is often misused or mistreated as there is no ownership or incentives to insure they are used correctly or efficiently.

• Environment concerns are often overlooked.

Transitional Economies

• These are economic systems in transition from command to competition. Russia – Hungary are two examples of these. Many firms in these countries are in transition from state owned to privatization. This is a relatively new designation and not really considered to be one of the other three “pure” economic systems.

Market Economy

• In this system natural resources and capital goods are privately owned and the government does not intervene in its workings.

• The three basic economic questions are answered by the free market through the “invisible hand” as defined by Adam Smith.

Market EconomyUnfortunately, there are flaws:

• Because the government does not interfere there is the opportunity for property rights to be abused.

• When people have few skills to sell this type of economy, it does not offer any guarantee of income such as minimum wage so that poverty would be more prevalent.

• Because this is a competitive economy there is incentive for some firms to employ ruthless business practices.

Market EconomyUnfortunately, there are flaws:

• There would be a lack of public goods as the free market would not be inclined to produce them for everyone unless there was profit in it, therefore, many of the goods we take for granted would not be available at all or be so expensive that many would not be able to partake of them.

• Externalities would abound. Because there is no government involvement in the economy many firms would save money by employing methods that would harm the environment and innocent 3rd parties.

Mixed Economy While the United States is

predominately a market economy it is in reality a mixed economy. Our economic system has elements of all of the above “pure” economic systems and the three economic questions are answered by the people , business and government.

Production Possibilities Frontier• This curve is a model that shows the

combination of two products that a nation can produce given its state of technology and assuming that it has full employment and efficient resource allocation. Remember that in dealing with PPF curves that they will change as technology changes. This means that they will never be stagnant and will always be in state of flux.

• Assumption – At point A all resources are used to produce consumer goods (jeans, CDs, TVs ect.) P

• Point B all resources are used to produce capital goods (tractors, trucks, machines).

• Point C - Combination production of Y1, X1

• Point D – A shift to X2, but we gave up from Y1 to Y2 of consumer goods. (Note – to produce more of one good entails giving up production of other goods. This is demonstrated by the GUNS v. BUTTER example.

• Point E – Realistic point where resources are not being used efficiently.

A

B

C

D E

H

G

Consumer Goods

Y1

Y2

X1 X2

•Point G – Unattainable level of production given the technology available.

•Point H – A catastrophe has seriously reduced this nation’s ability to produce.

Business Cycle Business cycles occur throughout our history with no two ever being identical. Basically, the cycle is composed of the phases shown in the diagram above. To help you understand the process it is imperative that we understand the terminology of it, which we have below.

GDP – Since 1990 the leading economic indicator of economic growth used by the government replacing the GNP. The GDP is the total market value for all final goods and services produced annually within the boundaries of the US, whether by American or foreign-supplied resources.

Peak – the highest point in real GDP before a recession.

Recession – a decline in real GDP that lasts for at least 6 months. •Businesses cut back on production. •Some businesses go bankrupt. •Consumers spend less money. •Individuals lose their jobs. •High unemployment raises government expenditure on benefits and reduces government revenue from taxes. •Prices fall.

Trough – the lowest point in real GDP at the end of the recession.

Recovery – The period between the trough of a recession and the Expansion in which we see a general rising of output and increased hiring.

Expansion: A period when the economy moves between a recovery and a peak. Both business and consumer confidence are high leading to increased investment and consumption.

Exp

ansi

on Exp

ansi

on

PRODUCTION POSSIBILITIES FRONTIER

(PPF Handout)

Economic Systems and Economic Tools

Documents

Transcript of Economic Systems and Economic Tools