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Economic SystemsEconomic Systems
WHAT IS ECONOMICS?WHAT IS ECONOMICS?
EconomicsEconomics - the study of how - the study of how people meet their basic needspeople meet their basic needs
Economists - Economists - People who study People who study economics.economics.
THE PROBLEM OF SCARCITYTHE PROBLEM OF SCARCITY
2 basic ideas of Scarcity:2 basic ideas of Scarcity: People usually have People usually have unlimited unlimited
wantswants. . A society can produce only a A society can produce only a limitedlimited
number of things at any one timenumber of things at any one time
WHAT ARE GOODS AND SERVICES?WHAT ARE GOODS AND SERVICES?
Goods - things that people make; Goods - things that people make; for example: foods, toys, clothes, for example: foods, toys, clothes, cars & houses.cars & houses.
Services - things that people do for Services - things that people do for others, examples: electricians, others, examples: electricians, teachers, plumbers, doctors & teachers, plumbers, doctors & mechanicsmechanics
APPLYING WHAT YOU HAVE LEARNEDAPPLYING WHAT YOU HAVE LEARNED
Suppose that everyone in the world Suppose that everyone in the world were given 10 million dollars. Do you were given 10 million dollars. Do you think that would end the problem of think that would end the problem of scarcity? Explain your answer.scarcity? Explain your answer.
THE FUNDAMENTAL ECONOMIC THE FUNDAMENTAL ECONOMIC QUESTIONSQUESTIONS
WHAT SHOULD BE PRODUCED?WHAT SHOULD BE PRODUCED? HOW SHOULD IT BE PRODUCED?HOW SHOULD IT BE PRODUCED? WHO SHOULD GET IT?WHO SHOULD GET IT?
TYPES OF TYPES OF ECONOMIC SYSTEMSECONOMIC SYSTEMS
Economic systemEconomic system - The way in - The way in which a society answers these 3 which a society answers these 3 economic questionseconomic questions
5 economic systems:5 economic systems:• TraditionalTraditional• Free EnterpriseFree Enterprise• CommunistCommunist• SocialistSocialist• MixedMixed
TRADITIONAL ECONOMY TRADITIONAL ECONOMY
Economic DecisionsEconomic Decisions: Custom and : Custom and tradition determine what should be tradition determine what should be produced, how it should be produced, how it should be produced, and for whomproduced, and for whom
TRADITIONAL ECONOMY TRADITIONAL ECONOMY
ProductionProduction: based on : based on custom and time-custom and time-honored methods. honored methods. • New ideas are New ideas are
discourageddiscouraged• Change and growth Change and growth
proceed very slowlyproceed very slowly
TRADITIONAL ECONOMYTRADITIONAL ECONOMY
Private PropertyPrivate Property: is no private : is no private property: owned by the family or property: owned by the family or village in commonvillage in common
TRADITIONAL ECONOMY TRADITIONAL ECONOMY
TradeTrade: very little : very little trade with outsiders, trade with outsiders, good produce & good produce & consumer locallyconsumer locally
Barter system (trade Barter system (trade things for thingsthings for things
PRODUCTION METHODSPRODUCTION METHODS
Traditional economies are generally Traditional economies are generally marked by subsistence agriculture marked by subsistence agriculture and cottage industriesand cottage industries
PRODUCTION METHODSPRODUCTION METHODS
Subsistence Subsistence AgricultureAgriculture: primarily : primarily involved with feeding involved with feeding themselves from their own themselves from their own land and livestock, there land and livestock, there is no surplus, so very little is no surplus, so very little is sold or traded.is sold or traded.
• In most of Africa, Asia, and In most of Africa, Asia, and many parts of Latin America, many parts of Latin America, people are subsistence people are subsistence farmers. farmers.
PRODUCTION METHODSPRODUCTION METHODS
Cottage IndustriesCottage Industries: people use : people use their spare time in their home to their spare time in their home to produce goods by hand, examples: produce goods by hand, examples: weave cloth, make furniture and weave cloth, make furniture and clothes, and clothes, and • Help farm families meet their needs Help farm families meet their needs
(extra income during winter months)(extra income during winter months)
PRODUCTION METHODSPRODUCTION METHODS
Today, traditional economies are still Today, traditional economies are still found in many rural, non-industrial found in many rural, non-industrial areas.areas.
Examples: Bedouins of Saudi Arabia, Examples: Bedouins of Saudi Arabia, Aboriginal people of Australia, Aboriginal people of Australia, Bushmen of the Kalahari, Berbers of Bushmen of the Kalahari, Berbers of AlgeriaAlgeria
FREE ENTERPRISE SYSTEMFREE ENTERPRISE SYSTEM
Also known as Also known as capitalismcapitalism or the or the free market systemfree market system
3 fundamental questions are 3 fundamental questions are answered by:answered by:• Interplay between Interplay between consumersconsumers (buyers) (buyers)
and and producersproducers (sellers) (sellers)
FREE ENTERPRISE SYSTEMFREE ENTERPRISE SYSTEM
Private PropertyPrivate Property: : People have a right to People have a right to own private property own private property and to use it as they and to use it as they see fit with limited see fit with limited governmental governmental interferenceinterference
• Examples: personal Examples: personal possessions, factories, possessions, factories, farms, businessesfarms, businesses
FREE ENTERPRISE FREE ENTERPRISE SYSTEMSYSTEM
Free EnterpriseFree Enterprise: People are free to : People are free to take part in any business, buy any take part in any business, buy any product, or sell any legal product.product, or sell any legal product.
• Businesses are also free to do anything Businesses are also free to do anything they wish in order to attract customers – they wish in order to attract customers – such as lower prices, provide better such as lower prices, provide better quality goods, advertise, etc.quality goods, advertise, etc.
FREE ENTERPRISE SYSTEMFREE ENTERPRISE SYSTEM
ProfitProfit – what remains after the cost – what remains after the cost of running the business are paidof running the business are paid
Profit MotiveProfit Motive:: The ability to make The ability to make profits is what drives people to risk profits is what drives people to risk their money in starting a new their money in starting a new businessbusiness
FREE ENTERPRISE SYSTEMFREE ENTERPRISE SYSTEM
HOW PRICES ARE DETERMINEDHOW PRICES ARE DETERMINED Supply and DemandSupply and Demand: The interaction : The interaction
of supply and demand determine of supply and demand determine prices in a free market economy.prices in a free market economy.• When demand is high, the price goes upWhen demand is high, the price goes up• If the supply is high but demand is low, If the supply is high but demand is low,
the price goes downthe price goes down
INTERACTION OF SUPPLY & INTERACTION OF SUPPLY & DEMANDDEMAND
LOW DEMAND/LOW DEMAND/LARGE SUPPLYLARGE SUPPLY
HIGH DEMAND/HIGH DEMAND/SHORT SUPPLYSHORT SUPPLY
PRICE
PRICE
FREE ENTERPRISE SYSTEM MAIN FREE ENTERPRISE SYSTEM MAIN FEATURESFEATURES
Supply and demand Supply and demand is the force behind is the force behind how resources are how resources are allocated/assigned. allocated/assigned.
Supply and demand Supply and demand lead to the lead to the distribution of distribution of resources in the resources in the most efficient way most efficient way possible. possible.
FREE ENTERPRISE SYSTEM MAIN FREE ENTERPRISE SYSTEM MAIN FEATURESFEATURES
Free enterprise economies will Free enterprise economies will eliminate inefficient producers and eliminate inefficient producers and limit the production of unwanted limit the production of unwanted goodsgoods
FREE ENTERPRISE SYSTEMFREE ENTERPRISE SYSTEM
THE ROLE OF THE ROLE OF GOVERNMENT:GOVERNMENT:
Limited government Limited government interferenceinterference
BUT, GOVERNMENT:BUT, GOVERNMENT:• Provides and enforces Provides and enforces
common rulescommon rules• Maintains a monetary Maintains a monetary
systemsystem• Provides for the nation’s Provides for the nation’s
defense (protection)defense (protection)
FREE ENTERPRISE SYSTEMFREE ENTERPRISE SYSTEM
THE ROLE OF THE ROLE OF GOVERNMENT:GOVERNMENT:• Protects people’s rights Protects people’s rights
to own propertyto own property• Break up or regulate Break up or regulate
companies that have companies that have obtained so much power obtained so much power that they could defy that they could defy market forces market forces (Monopolies)(Monopolies)
FREE ENTERPRISE SYSTEMFREE ENTERPRISE SYSTEM
PRODUCTION METHODS:PRODUCTION METHODS: Commercial agricultureCommercial agriculture, crop , crop
production for distribution to production for distribution to wholesalers and retailerswholesalers and retailers• Supermarkets & grocery storesSupermarkets & grocery stores• Large-scale commercial agriculture Large-scale commercial agriculture
makes production cheapermakes production cheaper
FREE ENTERPRISE SYSTEMFREE ENTERPRISE SYSTEM
PRODUCTION METHODS:PRODUCTION METHODS:
Commercial industriesCommercial industries, goods , goods manufactured in factories for sale manufactured in factories for sale throughout the country or overseasthroughout the country or overseas
FREE ENTERPRISE SYSTEMFREE ENTERPRISE SYSTEM
EXAMPLES:EXAMPLES:
The free enterprise system exists in The free enterprise system exists in such nations as the such nations as the United States, United States, Great Britain, France, Chile, Great Britain, France, Chile, Japan, Canada, Germany,Japan, Canada, Germany, and and SingaporeSingapore
FREE ENTERPRISE SYSTEMFREE ENTERPRISE SYSTEM
APPLYING WHAT YOU HAVE LEARNED:APPLYING WHAT YOU HAVE LEARNED: Think of a good or service you Think of a good or service you
bought recently.bought recently. Explain how the interaction of supply Explain how the interaction of supply
and demand most likely determined and demand most likely determined how much you paid for the product.how much you paid for the product.
COMMUNISMCOMMUNISM Developed in the 1800s by Karl Marx Developed in the 1800s by Karl Marx Marx believed that business owners Marx believed that business owners
(capitalist) use their wealth to take (capitalist) use their wealth to take advantage of workers by taking away advantage of workers by taking away most of the value of what they producedmost of the value of what they produced
COMMUNISMCOMMUNISM Workers would eventually rise up and Workers would eventually rise up and
overthrow their capitalist rulers in a overthrow their capitalist rulers in a violent revolutionviolent revolution
Communism would be the resultCommunism would be the result
COMMUNISMCOMMUNISM
Role of GovernmentRole of Government: All major : All major decisions on production, distribution decisions on production, distribution and the use of resources are made by and the use of resources are made by government plannersgovernment planners
COMMUNISMCOMMUNISM
Private PropertyPrivate Property: None, ownership : None, ownership abolished & national ownership of all abolished & national ownership of all land, factories, farms, and major land, factories, farms, and major resources.resources.
COMMUNISMCOMMUNISM
CooperationCooperation: Communism based on : Communism based on cooperation, all workers should labor cooperation, all workers should labor together & share equally.together & share equally.
• The economy is supposed to be run for The economy is supposed to be run for the benefit of all membersthe benefit of all members
• In practice, government leaders run In practice, government leaders run things to prepare for true communismthings to prepare for true communism
COMMUNISMCOMMUNISM
Major GoalMajor Goal: The : The goal is to achieve goal is to achieve a classless society a classless society • Equality among all Equality among all
workersworkers
DOWNFALL OF COMMUNISMDOWNFALL OF COMMUNISM
There once were many Communist There once were many Communist statesstates
• Soviet UnionSoviet Union• Countries of Eastern EuropeCountries of Eastern Europe• ChinaChina• North KoreaNorth Korea• VietnamVietnam• CubaCuba
The Soviet Union and Eastern The Soviet Union and Eastern Europe abandoned Communism in Europe abandoned Communism in the late 1980’s & 90the late 1980’s & 90
DOWNFALL OF COMMUNISMDOWNFALL OF COMMUNISM
1.1. Economies could not keep up with Economies could not keep up with the goods produced by free the goods produced by free enterprise systemsenterprise systems
2.2. Without incentives most workers Without incentives most workers failed to work hard or to do their failed to work hard or to do their bestbest
3.3. Corruption became widespreadCorruption became widespread• Bribing government officials for Bribing government officials for
better/more stuffbetter/more stuff
COMMUNISM TODAYCOMMUNISM TODAY
China, North Korea, Vietnam, and China, North Korea, Vietnam, and Cuba are still Communist countriesCuba are still Communist countries
China, however, has kept it China, however, has kept it communist political system but has communist political system but has taken steps towards creating a free taken steps towards creating a free enterprise economyenterprise economy
SOCIALISMSOCIALISM
Began in the 1800s as a Began in the 1800s as a political movement in political movement in response to exploitation of response to exploitation of workers in Europe workers in Europe (industrialization)(industrialization)
Government owns major Government owns major industries but allows other industries but allows other industries to function as a industries to function as a free enterprise economy free enterprise economy also called “free market also called “free market socialism” because state not socialism” because state not involve planning.involve planning.
SOCIALISMSOCIALISM
View the View the government as government as the best protector the best protector of workersof workers
SOCIALISMSOCIALISM
Role of GovernmentRole of Government: brings end to : brings end to poverty by controlling of major poverty by controlling of major resources of the nation resources of the nation ((railroads, railroads, airlines, radio stations, banks, airlines, radio stations, banks, utility companiesutility companies)) and by providing and by providing public services public services ((health care, health care, education, food stamps, housing, education, food stamps, housing, etcetc))
SOCIALISMSOCIALISM
Economic DecisionsEconomic Decisions: productions, : productions, distribution and the use of resources distribution and the use of resources are made by the government.are made by the government.
SOCIALISMSOCIALISM
Private PropertyPrivate Property: Major industries : Major industries are owned by the governmentare owned by the government
• Other property is held privatelyOther property is held privately• Small businesses and manufacturersSmall businesses and manufacturers
SOCIALISMSOCIALISM Major Goal: a fairer Major Goal: a fairer
distribution of distribution of income among all income among all members of society.members of society.
• People’s basic needs People’s basic needs (health care, (health care, transportation, transportation, education, housing) education, housing) are met for free or at are met for free or at very low cost, but very low cost, but high taxeshigh taxes
EXAMPLES OF SOCIALIST EXAMPLES OF SOCIALIST COUNTRIESCOUNTRIES
Sweden and IsraelSweden and Israel After WWII, most countries in After WWII, most countries in
Western EuropeWestern Europe• However, sold off their public However, sold off their public
ownership of major industries in the ownership of major industries in the 1980’s and 1990’s in a wave of 1980’s and 1990’s in a wave of “privatization”“privatization”
MIXED ECONOMYMIXED ECONOMY
In the real world, In the real world, no economy no economy follows any one follows any one economic system.economic system.
Most countries Most countries have economies have economies that blend features that blend features of each.of each.
APPLYING WHAT YOU HAVE LEARNED
Economic Systems
What to Produce?
How is it Produced?
Who Gets it?
Traditional Set by tradition & custom
Set by tradition & custom
Set by tradition & custom
Free Enterprise
Interaction of producer/ consumers
Producers decide how to produce
Consumers decide who get products
APPLYING WHAT YOU HAVE LEARNED
Economic Systems
What to Produce?
How is it Produced?
Who Gets it?
Communism Determined by government planners
Determined by government planners
Determined by government planners
Socialism Determined by government planners
Determined by government planners
Consumers determine who get products
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