ECONOMIC SYSTEMSSSEF4 The student will compare and contrast different economic systems and explain how they answer the three basic economic questions of what to produce, how to produce, and for whom to produce.

A .Compare command, market, and mixed economic systems with regard to private ownership, profit motive, consumer sovereignty, competition, and government regulation.

B. Evaluate how well each type of system answers the three economics questions and meets the broad social and economic goals of freedom, security, equity, growth, efficiency, and stability.

SSEF5 The student will describe the roles of government in a market economy.

A .Explain why government provides public goods and services, redistributes income, protects property rights, and resolves market failures.

B. Give examples of government regulation and deregulation and their effects on consumers and producers

FIRST, WE NEED TO UNDERSTAND AN IMPORTANT ECONOMIC NOTION If I said “If you do something wrong, I will punish you.” I

have given you a negative incentive. If I said, “If you study hard and do you work, you will earn

a good grade” I have given you a positive incentive. Incentives are our reasons for performing an action

(Positive) or for avoiding an action (Negative) We also have basic economic questions that we can ask: 1) What to produce? 2) How to produce? 3) For whom do we produce?

4 TYPES OF ECONOMIES

Traditional Based on family/community custom

and rituals EX. Aborigines, Amazon tribes

Market Relies on the consumption choices

of consumers Capitalist nations: EX. Japan, US*

Command Government decides on 3 economic

questions North Korea, China, Cuba

Mixed Aspects of Market and Command

Most nations really fall in this category*

MARKET SYSTEM

The incentive in a market system is to make a profit, we call this the profit motive

Profit is when total gains > total costs

Because of this motivation, it is important that we allow individuals to own the means of production (land, labor, and capital)

We call this Private Ownership

MARKET SYSTEM

Buyers and sellers determine prices and products together

Producers own the means of production, seek a profit, so make things they believe will sell

Consumers have the freedom to purchase when they wish, how many they wish, and what they wish

We call this Consumer Sovereignty

MARKET SYSTEM

With so many producers each seeking a profit, it is imperative that there is competition

IF one competitor invents a new method or a new product, they will reap the maximum profits and others will be left behind

This competition fuels innovation and economic growth

COMMAND SYSTEM

On the other side of the spectrum is the command system

The incentive in the command system is to produce equality among citizens

To do this, the government plans the economy and owns the means of production

COMMAND SYSTEM

The government owns the means of production, so private ownership is strongly discouraged

Because the motive is for people to have equally, profit motive is extremely limited

In order to secure equality, the government dictates what is produced, how to produce, and for whom to produce

Since the government is the only producer, competition is limited

MIXED SYSTEM

The majority of the world lives in this form of economy. Depending on where you live, the amount of government

intervention in the economy will vary. Places like Singapore, Hong Kong, and the U.S. have less

government intervention than places like Sweden, Italy, while places like Cuba and North Korea are completely dependent on government decisions.

BROAD SOCIAL GOALS

Every economic system must deal with scarcity of resources and the policies a state chooses will try to emphasis social goals the people believe are most important

ECONOMIC EFFICIENCY

Using limited resources to produce the most goods and services to satisfy people’s wants

Marginal analysis must happen!

Benefits of the good being produced > cost, then produce the good!

ECONOMIC EQUITY

Based on people’s beliefs of morality – right and wrong

Usually deal with redistribution of wealth

How much should one group be taxed to provide goods and services to others?

Medicare, unemployment, job training programs, food stamps, etc.

ECONOMIC FREEDOM

Choose what to buy and sell

Where to work and live Where to open a business Some freedoms must be

restricted for general welfare of society

Illegal drugs cannot be bought/sold

Taxes limit individual’s ability to decide how to spend some of their income

ECONOMIC GROWTH

Increase in the goods and services produced in a country

GDP must increase, meaning more goods and services need to be produced

Investing in capital goods and education help produce economic growth

ECONOMIC SECURITY

Protection for consumers and producers against economic risks

Loss of job, inability to work due to illness or old age, business or bank failures, etc.

Individuals try to maintain security by saving money and purchasing goods and services and insurance

Gov’t programs also offer security – “safety nets”

ECONOMIC STABILITY

Steady economic growth with no big swings in output or consumption

Employment stability with no swings in employment/unemployment

Price stability when prices do not rise or fall rapidly – this allows people and businesses to plan long term when taking loans or purchasing for future production