Economic Systems

There’s a problem…

• We all have wants.– Food– Cell phones– Good education– Crocs– Selfie sticks– Fashionable tape

dispensers• But you can’t always

get what you want.

Problem: Economic Scarcity

• There’s not an infinite amount of resources– Raw materials– Workers– Time

• We have to make CHOICES

Three Basic Economic Questions

What will we make?

How will we make it?

Who gets it?

1

2

3

Two Modern Approaches

Market EconomiesPlanned Economies

Who Owns the Factors of Production?

Land

Labor

Capital

Entrepreneurship

Planned Economy: Communism

“The theory of communism may be summed up in the single sentence: abolition of private property.”

Planned Economy: Communism• True

communism a classless society

• Everyone owns the factors of production

• Everything distributed equally– No competition

1. Produce needs, not wants2. Make needs as close to free as possible3. Treat workers better (safe, high wages,

benefits)4. No private property5. Economic equality6. Central planning of production7. No entrepreneurs

Communist Philosophy

• Greater income equality• Full employment• Fewer economic recessions• Production of goods and services is planned

to meet society’s needs• Consumers receive basic necessities

Advantages of Communism

• Lack of incentive• Low quality goods and services• Lower standards of living• Slow or stagnant economic growth• Lack of technological progress• Bureaucracies (planning creates inflexibility)• Black markets• Loss of individuality• Inefficient and widespread waste of resources

Disadvantages of Communism

Examples of Communism

• China, Cuba, & the former Soviet Union…

• …except not really.• No country has ever

TRULY been communist

Planned Economy: Socialism• Some private

property & some public ownership in control of industry

• Goal is to set collective objectives & provide equal access to resources– Education– Healthcare

Socialist Philosophy• Socialism = many

economic rules (fewer rights)

• Price controls• High taxes• Cheap or “free”

healthcare, education• Safety for workers• Democratic

Planned Economies“In both communism and socialism, there is economic planning, and the government, usually in the form of some bureaucratic agency, helps decide what to produce, how to produce it, and who gets it.”

Planned Economies• If gov’t is completely

in control of economy, it is a command economy– Even decides # of

shoes to be produced!

Market Economies

• Also called capitalist economies

• Individuals own factors of production– Gov’t stays out

• Gov’t has a laissez-faire approach to production, commerce, & trade

Market Economies• Businesses make things,

not to do good for mankind, but to make dat $$ MoNeY $$

• Since consumers get to choose, producers need to make product with the right features at the right price– “Invisible Hand” of

economy

Example: Cars

• If consumers prefer one company’s car, that business will profit more & have incentive to produce more cars

• Car companies that don’t will disappear

Market Economies• Scarce resources will

go to most desired use & will be used efficiently

• If a business is wasteful & inefficient or makes something no one wants, another business will make a similar product better and/or cheaper

But if the Government Was in Charge

• Wouldn’t be able to quickly respond to changes in tastes & preferences

• Efficiency would suffer

The Invisible Hand

• Businesses & individuals meet society’s needs when they seek own self-interest

• Competitive markets w/ profit-seeking businesses have incentive to produce high-quality products as efficiently as possible

Planned Economy: Communism

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self interest.”

• Efficient use of factors of production• Faster economic growth• High-quality goods and services• Higher standards of living

Advantages of Capitalism

• Greater unemployment• Frequent economic recessions• Greater income inequality• Greater economic insecurity

Disadvantages of Capitalism

Why Does Government Ever Intervene?So if markets are soooo perfect,

What Free Markets Won’t Do…• Maintain rule of law– Law, police, courts,

etc.• Provide public

services– Roads, bridges,

education, defense

• Little profit in these areas, so gov’t must step in

Mixed Economies

“Modern economies are neither completely free market nor planned. There’s a spectrum of government involvement.

Mixed Economies• Most modern

economies have free markets AND gov’t intervention

• Can be explained by the circular flow model

The Circular Flow Model

Two key players in modern economies: households & businesses

The Circular Flow Model

Businesses sell goods & services to household. In order to buy goods & services, households sell resources (labor) to businesses.

The Circular Flow Model

My Pizzeria

• How would my pizzeria function under different economic systems?

My Pizzeria in a Free Market

• I answer the basic economic questions!• I determine how much cheese and pepperoni

goes on the pizza• I determine the quality of the cheese and

pepperoni• I set my employees wages• I set my business hours

My Pizzeria in a Command Economy• The government answers the basic economic

questions• The government sets the amount of cheese and

pepperoni on each pizza• The government determines quality of cheese

and pepperoni• The government sets employees wages• The government sets business hours

Problem: What does the government know about pizza?

My Pizzeria in a Mixed Economy

• The Government and I both answer the basic economic questions

• I determine the amount of cheese and pepperoni on the pizzas; government determines the quality of cheese and pizza

• I set employee wages; government sets minimum wage for employees

• I determine business hours; government determines whether I am safe to be open or not

A Range of Economic systemsDepends on Economic Rights

Free MarketMixedCommand

Hong Kong

Dubai

Singapore

Germany

France

SwedenUSSR

Cuba

North Korea

UK

Canada

Peru

South Africa

China

Greece