Economic Systems. WHAT IS ECONOMICS? Economics - the study of how people meet their basic needs Economics - the study of how people meet their basic needs

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


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


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


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.


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)


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)


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.


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


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


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)


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)


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


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


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


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


Socialism Determined by government planners


Consumers determine who get products

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Economic Systems. WHAT IS ECONOMICS? Economics - the study of how people meet their basic needs Economics - the study of how people meet their basic needs