SSEF4a – Compare command, market, and mixed economic systems with regard to private

ownership, profit motive, consumer sovereignty, competition, and government regulation

1

Economic Systems

Scarcity Means There Is Not Enough For Everyone

Government must step in to help allocate (distribute) resources 2

Scarcity Bus RideScenario:

A group of 40 college students get on a bus to go to a dance 30 miles away.

Shortly after leaving, the bus finds that it is too heavy to go over a large hill

10 students need to get off the busYou and your partner need to find 5 different

ways to decide who should get off the bus.1. Are any of the solutions fair?2. How are resources allocated in communism?3. How are resources allocated in capitalism?4. What role do prices play in capitalism?

3

Every society must answer three questions:

The Three Economic Questions1. What goods and services should be

produced? 2. How should these goods and services be

produced? 3. Who consumes these goods and services?

The way these questions are answered determines the economic system

An economic system is the method used by a society to produce and distribute goods and

services. 4

Types of Economics Systems

• Economics Systems

1. Command

2. Market

3. Mixed-Market

Command Economies(aka Communism)

6

Command EconomiesIn a command economy (communism) the

government… 1. owns all the resources. 2. answers the three economic questions

Examples:Cuba, North Korea, former Soviet Union, and China?

Why do command economies face problems of poor-quality goods, shortages, and

unhappy citizens? NO PROFIT MEANS NO INCENTIVE TO

WORK HARDER!! 7

Irrational Soviet ProductionSoviet companies were not guided by prices or profit. Gov’t officials

determined output quotas based on quantitative measurements. Businesses were paid based on meeting these quotas.

1. Why did a business make desk lamps that were filled with lead that were almost too heavy to carry?

2. Why did light bulb producers only make tiny night light size bulbs?

3. Why did oil companies drill many shallow holes when they knew that oil deposits are usually found in deep holes that require slower drilling?

4. Why did a construction superintendent order his workers to remove bathtubs from the first floor and install them in the third floor while he slowly lead inspectors through apartment building.

5. Why did black market vendors sell burned out light bulbs?

8

Production quota based on weight

Production quota based number of bulbs produced

Production quota based number of feet drilled

Quota on # of apartments complete at inspection

Business got resources before the public so workers would steal good light bulbs from work and replace them with burnt out bulbs

Advantages and Disadvantages

1. Low unemployment-everyone has a job

2. Great Job Security-the government doesn’t go out of business

3. Equal incomes means no extremely poor people

4. Free Health Care

What is GOOD about command economies?

What is BAD about command economies?

1. No incentive to work harder

2. No incentive to innovate or come up with good ideas

3. No Competition keeps quality of goods poor.

4. Corrupt leaders5. Few individual

freedoms (consumer sovereignty/choice) 9

Market System(aka Capitalism)

10

Characteristics of a Market Economy

1. Little government involvement in the economy. (Laissez Faire = Let it be)

2. Individuals OWN resources and answer the three economic questions.

3. The opportunity to make PROFIT gives people INCENTIVE to produce quality items efficiently.

4. Wide variety of goods available to consumers. 5. Competition and Self-Interest work together to

regulate the economy (keep prices down and quality up).

Reword for Communism 11

Example of Market EconomyExample of how the free market regulates itself:If consumers want computers and only one company is making them… • Other businesses have the INCENTIVE to start

making computers to earn PROFIT. • This leads to more COMPETITION….• Which means lower prices, better quality, and

more product variety. • We produce the goods and services that society

wants because “resources follow profits”.The End Result: Most efficient production of the

goods that consumers want, produced at the lowest prices and the highest quality.

12

Example of CommunismExample of why communism failed:If consumers want computers and only one company is making them… • Other businesses CANNOT start making

computers. • There is NO COMPETITION….• Which means higher prices, lower quality, and

less product variety. • More computers will not be made until the

government decides to create a new factory.The End Result: There is a shortage of goods that consumers want, produced at the highest prices

and the lowest quality.13

The Invisible HandThe concept that society’s goals will be met as

individuals seek their own self-interest.

Example: Society wants fuel efficient cars…• Profit seeking producers will make more.• Competition between firms results in low

prices, high quality, and greater efficiency. • The government doesn’t need to get involved

since the needs of society are automatically met.

Competition and self-interest act as an invisible hand that regulates the free market.

14

Attacks Against Capitalism

15

16

1. Companies are greedy and do anything to screw over consumers!

• Companies have an incentive to satisfy the needs of consumers. If they don’t they will go out of business.

2. Capitalism causes companies to outsource US jobs overseas. America suffers because companies want more profit!

• How many of you lost your job to outsourcing? • How many of you benefit in the form of lower prices?3. Capitalism only helps the rich. US companies enslave and

exploit third-world workers in sweatshops!• Sweatshop workers are not forced labor. They make the

decision to work there voluntarily. Why?• Although the working conditions are far below US

standards, working in a sweatshop is better that the alternative• Sweatshop wages in Vietnam, Honduras, and Nicaragua

are more than double the country’s average wage.

Attacks Against Capitalism

Sweatshops

17

Sweatshops Then

Sweatshops Now

Question: Who is to blame for these people being so poor? Answer: Low productivity. If a country doesn’t produce very much, it can’t afford to pay it’s workers very much. Why do these countries have such low productivity?Corrupt governments, inadequate physical capital and infrastructure, and underdeveloped human capital.What does foreign investment bring to poor countries?

"My concern is not that there are too many sweatshops, but that there are too few." -Jeffrey Sachs, Harvard University

Productivity Creates Wealth

18

3rd World Countries Developed Countries

Mixed-Market System

19

Mixed Economy• A mixed economy has elements of both market

and command economies• Individual buyers and sellers often have the

right to decide how scarce resources are allocated

• The government plays a role when needed

Market system Government

Mixed-market

Economy

Resolving Market Failures

A market failure is a situation where markets fail to allocate resources efficiently.

Command

• No market failures

• No markets

Mixed

• The government regulates

Market

• Buyers and sellers

• Survival of the fittest

Connection to the PPC

Communism in the Long Run

Free Markets in the Long Run

Consumer goods

Cap

ital

Goo

ds CURRENT

CURVE

FUTURECURVE

Consumer goodsC

apit

al G

ood

s

FUTURECURVE

CURRENTCURVE

Costa RicaCuba22

The difference between North and South Korea at night. North Korea's GDP is $40 Billion

South Korea's GDP is $1.3 Trillion (32 times greater).

Social Goals of Economic Systems

Command vs. Market Economy Goals

• Goals of a society differ depending on the type of market structure in the economy.

• There are 6 social goals of economics– Goals 1-3 are valued by Command economies– Goals 4-6 are valued by Market and mixed

market economies

25

VALUED BY COMMAND ECONOMIES

Goals 1-3

26

• Protection from layoffs and illness

• Measurement: Welfare total recipients, social security expenditures, and unemployment rate

Goal 1: Economic Security

• If people cannot work they cannot support their family. Society is hurt.

• Unemployment reduces efficiency• Unemployed people must rely on others for

support (family, friends, gov’t, etc.)• Measurement: Unemployment rate

Goal 2: Full Employment

• Inflation is a rise in the general level of prices• Inflation reduces every person’s buying power• Inflation is especially difficult for people on

fixed incomes (those that do not rise as prices rise)

• Inflation hurts savers• Measurement: Consumer Price Index (CPI)

Goal 3: Price Stability

VALUED BY MIXED & MARKET ECONOMIES

Goals 4-6

30

• The right to choose your own occupation, employer, and use of your money.

• Business owners have the right to produce what they want and how much they want.

• Measurement: Corporate profits, GNP, GDP, and Unemployment

Goal 4: Economic Freedom

• Equity mean fairness– Illegal to discriminate based on age, race,

sex, or disbility– False Advertising, unfair pricing, and

dangerous products prohibited• Measurement: Unemployment, # of

discrimination cases, minimum wage

Goal 5: Economic Equity

• Necessary to satisfy the needs and wants of a growing population

• Do you want your children to live better than you? Do you want to improve the quality of medical care? Transportation? (etc.)– To do this requires economics growth.

• Measurement: GNP, Corporate profits, Dow Jones Industrial Average

Goal 6: Economic Growth

Goal Command Market/Mixed-Market

Economic Freedom

Economic Equity

Economic Security

Full Employment

Price Stability

Economic Growth

Economic Goals by System

Goal Command Market/Mixed-Market

Economic Freedom √Equity Efficiency

Economic Security

Full Employment

Price Stability

Economic Growth

Economic Goals by System

Goal Command Market/Mixed-Market

Economic Freedom √Economic Equity √

Economic Security

Full Employment

Price Stability

Economic Growth

Economic Goals by System

Goal Command Market/Mixed-Market

Economic Freedom √Economic Equity √

Economic Security √Full Employment

Price Stability

Economic Growth

Economic Goals by System

Goal Command Market/Mixed-Market

Economic Freedom √Economic Equity √

Economic Security √Full Employment √

Price Stability

Economic Growth

Economic Goals by System

Goal Command Market/Mixed-Market

Economic Freedom √Economic Equity √

Economic Security √Full Employment √

Price Stability √Economic Growth

Economic Goals by System

Goal Command Market/Mixed-Market

Economic Freedom √Economic Equity √

Economic Security √Full Employment √

Price Stability √Economic Growth √

Economic Goals by System