ECONOMIC SYSTEMS

Economics

Economic Systems

Institutional arrangements and coordinating mechanisms to deal with the economic problem of unlimited desires and limited (scarce) resources.

Differences between the systems is related to differences in:

who owns the means of production; methods used to motivate, coordinate and

direct economic activity.

2 Cows

http://www.quora.com/Nadeer-Hameed/Random-Posts/Economic-Models-Explained-With-Cows

4 Questions

What will be Produced?

How will Goods be Produced?

Who Gets the Goods Produced?

How Does the System Promote Progress?

Economic Systems

There are two basic systems that are used to answer the 4 basic questions:

Command System

Market System (Free markets are the basis of our Economic study)

Command System

State control of the factors of Production:

What to Produce How to Produce it Who to produce it for

In extreme, no private property

Market System

Private property: individuals, not the government owns most of the land and capital;

Freedom of Enterprise: people free to obtain and use resources as they choose;

Freedom of Choice: owners can buy or sell their property as they see fit;

Self Interest: individuals try to achieve their goals.

Market System

Competition: individuals free to buy/sell as they see fit; fair price is one agreed by willing buyer and willing seller;

Markets and Prices: Markets bring buyers and sellers together;

Progress: system provides motivation for advancement;

Specialization: use of resources to produce one or a few goods or services.

Market System

What to Produce?Profitable products and services will continue to be

produced.

How will the Goods and Services Be produced?In combinations that will minimize cost per unit.

Who Gets the Production?Consumers who have the ability and willingness to

pay for the goods and services they desire.

Market System

Do we have a market system in the United States?

Why?

Has the system in the United States changed over time?

If yes, How?

Self-Interest

“In a market system, self interest is the motivating force of the various economic units as they express their free choices. Self interest simply means that each economic unit tries to achieve their own particular goal, which usually requires delivering something of value to someone else.”

Essentials of Economics , Brue and McConnell, page 29

Self-Interest

How do you feel about the statement on the previous slide? Do you agree or disagree?

Utilitarianism

Ethical doctrine that states that virtue is based on utility and that conduct should be directed to promoting the greatest good for the greatest number of people. (Dictionary.com)

Capitalism-An Image Problem?

True or False?1. In order to get rich, you have to make someone

else poor.2. Capitalism has lifted the world out of poverty. 3. Getting rich by creating a new product is

different (and better) than getting rich by buying and selling financial assets (stock, land).

4. Capitalism and self interest are centered on greed.

5. Government intervention creates barriers to business.

Capitalism Good for the Poor?

In asserting that capitalism is good for the poor, even its most ardent supporters must confront the question of whether capitalism promotes material well-being at the cost of moral depravity. Jesus’s unsettling query, “Does it profit a man to gain the world if he loses his soul?” is universal – the question is asked in some form by all major religions of the world – and echoes in even the most secular manifestations of civil society. The discipline of economics and the model of Homo economicus, or economic man, is built on the fundamental assumption of self-interest.

http://www.fte.org/teacher-resources/lesson-plans/is-capitalism-good-for-the-poor/the-ultimatum-game/

The Ultimatum Game

Is Capitalism Good for the Poor? | The Ultimatum Game

Game Set-up

Class will be split into two groups: Proposer and Responder.

Each person will be given a slip of paper with a special code written on it. This code is to be kept secret from the rest of the class. This code will determine who your partner is in this exercise. Envelopes will be used to keep the responses secret and to handle the payoff at the end.

Game Procedures

In this experiment each of you will be paired with another person in the room. One of you will be the proposer and the other the responder. You will never be told who your partner is.

For the first part of the experiment, the responders will be sent out to the hall for 3 minutes, where you will silently wait.

Game Procedures (cont’)

Once this is completed, the roles will be switched, with the proposers in the hall silently waiting, and the responders in the classroom.

We will then discuss the experiment as a class.

Proposer Specifics

You are being asked to split $20 between you and your unknown partner. You can split the $20 in any fashion that you desire, with two caveats:

1. The money must be split in even dollars (no change).

2. You have to give your partner at least $1.

Responder’s Role

The responder has one job- to either accept or reject the split that the proposer has suggested. If the split is rejected, then each of you will receive nothing.

Reward

In real life, this game is played with each pair splitting the $20 between them as suggested by the proposer. Today, only one pair from this class will split the $20. I will randomly draw out which group gets to split the $20. If your proposal is rejected, then you will not be eligible to win the reward.

Our Results

$19/$1-$18/$2-$17/$3-$16/$4-$15/$5-$14/$6-$13/$7-$12/$8-$11/$9-

$10/$10-$9/$11-$8/$12-$7/$13-$6/$14-$5/$15-$4/$16-$3/$17-$2/$18-$1/$19-

Results World Wide

The most common split is $10/$10

The average split is $12/$8

Approximately 20% of the low offers are rejected.

Capitalism and the Poor

Suppose that someone argued that capitalism is not good for the poor because it makes people greedy and selfish and encourages them to ignore others and think only of themselves. Could you use the results of ultimatum game experiments to counter that argument?

Definitions

Greed: excessive or rapacious desire, especially for wealth or possessions. (Dictionary.com)

Rapacious : given to seizing for plunder or the satisfaction of greed (Dictionary.com)

Plunder: to rob or goods or valuables by open force (Dictionary.com)

Economic Theory

Economic theory assumes that people act to try to achieve their own personal goals.

Self-Interest

Homework

Please write or type a 250 to 400 word response to the statement found below (paraphrased from the article “Self-Interest”)

It is in the best interests of the world that everyone acts only in their self-interest.

Circular Flow Model

Resource Market

Product Market

Producing Ohio: Economics in Action: Circular Flow

Circular Flow Model

http://study.com/academy/lesson/circular-flow-of-economic-activity-the-flow-of-goods-services-resources.html