Unit 1: Fundamental Economic Concepts. Chapter 2: Economic Choices and Decision Making. Lesson 4: Economic Systems

Transcription

1 Unit 1: Fundamental Economic Concepts Chapter 2: Economic Choices and Decision Making Lesson 4: Economic Systems 1

2 Your Objectives After this lesson you should be able to: 1. Describe the characteristics of the traditional, command, and market economics. 2. Explain the advantages and disadvantages of the traditional, command, and market economics. 2

3 Key Terms Economy Economic system Traditional economy Command economy Market economy 3

4 Economic Systems All societies have scarcely to deal with. Societies have to decide WHAT, HOW, & FOR WHOM to produce. All societies have an economic system. Organized way to answer the 3 economic questions. They way they answer these determine which system they use. 4

5 3 major type of economic systems Traditional Command Market 5

6 Traditional Economies A system that relies on customs, history & time-honored beliefs. Tradition guides economic decisions such as production and distribution. Traditional economies depend on agriculture, fishing, hunting, gathering or some combination of the above. They use barter instead of money. Most traditional economies operate in emerging markets and developing countries. They are often in Africa, Asia, Latin America and the Middle East. 6

7 Economists & anthropologists believe all other economies got their start as traditional economies. The remaining traditional economies should evolve into either market, command or mixed economies over time. 7

8 Five Characteristics of a Traditional Economy 1. Center around a family or tribe. A. They use traditions gained from the elders' experiences to guide day-to-day life & economic decisions. 2. Exists in a nomadic hunter-gatherers society. B. These societies usually compete with other groups for scarce natural resources. i. Little need for trade since they all consume and produce the same things. 8

9 3. Most produce only what they need. 1. There is rarely surplus or leftovers. That makes it unnecessary to trade or create money. 4. When they do trade, they rely on barter. 1. Because they just trade meat for fish, there is no need for cumbersome currency.r 5. Traditional economies start to evolve once they start farming and settle down. 1. More likely to have a surplus that they use for trade. 1. Create some form of money. That facilitates trading over long distances. 9

10 Advantages Everyone knows their role in their society. Hunters knows what they need to produce. Hunters knows how they will produce it. Hunters knows who will get what is produced. 10

11 There is little friction between members. Custom and tradition dictate the distribution of resources. Everyone knows their contribution toward production. Members also understand what they are likely to receive. Member understand that it's what's kept the society together & functioning for generations. Not as destructive to the environment as developed economies. More sustainable than a technology-based economy. 11

12 Disadvantages Discourages new ideas & new ways (better often) of doing things. Often some kind of punishment occurs if you buck the traditions. 12

13 Traditional economies are vulnerable to changes in nature, especially the weather. Traditional economies limit population growth. When the harvest or hunting is poor, people starve. They are vulnerable to market or command economies. Those societies often consume the natural resources traditional economies depend on or wage war. Ex: Russian oil development in Siberia has damaged streams and the tundra. Reduced traditional fishing and reindeer herding for traditional economies in those areas. 13

14 United States has replaced nearly all of its traditional economy elements. Some traditional elements. Traditional economy relies on agriculture, hunting and fishing. American traditions support the family farm. Laws and treaties also protect the fishing industry. Tradition & laws supports hunting & fishing. Laws and permits protect the right to hunt. 14

15 Command Economies Called a command economy because the government commands what is to be produced, sold for how much, and decides who will receive what is produces. People in living under this system are not free. 15

16 Socialism (aka democratic socialism) The government, not individuals, own the country s businesses. Transportation system, communication systems, oil, utilities, health care, education, welfare. Most socialist countries are democracies. The individual's vote and the majority who are poor or lower middle class vote to take the money/profits from those who have earned to pay for the goods and services they want, but do not want to pay for it or pay at least pay fair market value. 16

17 Communism Governmental system based on the writings of Karl Marx. Last stage of socialism. Government owns all business, land, means of production. Government planners decides how much of what you need to live no matter what you do for a job, how well you work, or how much you work. Government planners decide what level of schooling you will receive, what job you will have, & whether you have enough value to the govt to live. Always ran through a dictatorship. 17

18 Advantages Able to respond to system shocks very quickly. Former Soviet Union-rural agriculture society in heavy industry & industrial growth. Central planners moved all resources to this task. Consumer goods were ignored. Women were forced to work manual labor because all the men were forced to work in the industry efforts. Free health care (?) A simple research shows if you can get in to see a doctor before you die, the quality is near primitive. 18

19 Disadvantages Forced upon the people by the barrel of a gun. More people have been killed since 1917 in peacetime than all wars combined. Removes all incentive to work, improve, etc. No private ownership of anything. "From each according to his ability, to each according to his need(s)."~karl Marx, "Critique of the Gotha Program," Does not meet the needs or wants of consumers. Meets the wants of the government planners. 19

20 Communist Countries today People's Republic of China Becoming mix economically, but politically remains communist. Democratic People's Republic of Korea (North Korea) Adheres most strictly to communist principles Socialist Republic of Vietnam Lao People's Democratic Republic (Laos) Republic of Cuba 20

21 Socialist countries today Bolivarian Republic of Venezuela Kingdom of Denmark Republic of Finland Netherlands Canada Ireland Kingdom of Sweden Kingdom of Norway New Zealand Kingdom of Belgium People's Republic of Bangladesh Republic of GuineaBissau Co-operative Republic of Guyana Republic of India Federal Democratic Republic of Nepal 21

22 Many aspects of the U.S. economy follow the characteristics of a command economy. 1. Annual federal budget that outlines the government's priorities. Takes the place of a central plan. 2. Congress guides the allocation of resources. Taxes discourage some activities & subsidies encourage others. 22

23 3. Government spending follows the priorities for the country. For example, U.S. military spending increased after the 9/11 terrorist attacks. 4. Government owns a monopoly in important national industries. NASA, the interstate highway system & defense. 5. Federal government uses regulations to support economic priorities,. agriculture. 23

24 Market Economies Adam Smith 1776-An Inquiry into the Nature and Causes of the Wealth of Nations The natural market will answer the three basic questions Natural function of the market would always ensure stability and prosperity. 24

25 The market provided insight for the for fulfillment of the natural human tendency to trade, barter, and trade, while the market s invisible hand reconcile these individual activities to maintain an equilibrium. Great emphasis upon the ability of markets to adjust to economic shocks. Leave the market to its own natural processes & it will naturally find a point of equilibrium that will bring stability & prosperity for the highest number of people. 25

26 The market acts in its own best interest. Will answer the WHAT, HOW, & FOR WHOM. Consumers want a product or service. Businesses decide how to best produce what the consumer wants in the most efficient manner to earn as must profit as possible. The consumer who is able & willing pay for the good or service being demanded. 26

27 Within the market, the invisiable hand keeps an equilibrium between the price of a good or service for the natural effects of the market provides the consumer to decide if the trade off is worth it. 27

28 Market equilibrium When the supply & demand curves intersect, the market is in equilibrium. This is where the quantity demanded & quantity supplied are equal. The corresponding price is the equilibrium price or market-clearing price, the quantity is the equilibrium quantity. 28

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30 Advantages Provides the most freedom to people to earn as much wealth as they possibly can Provides th emost freedom for people to purchases any good & service they want. Raised more people out of poverty throughout the world than any other system in all of history. No government planners interfering with the market. Virtually unlimited choices for consumers. Most people report a high degree of consumer satisfaction. 30

31 Six defining characteristics The United States has all six characteristics of a market economy. 1. The law protects ownership of private property. 2. Everyone is free to live, work, produce, buy & sell whatever they choose (as long as it's legal.) 3. Self-interest drives the buying & selling of goods & services, including employment. Sellers want the highest price and buyers want the best value for their money. 31

32 4. The law protects competition. 5. Prices are allowed to float along with supply & demand. 6. The primary role of government is to make sure that everyone has free access to a free market. 32

33 Efficient Allocation of Resources Efficient Production Dynamic Efficiency Financial Incentives Creative destruction Economic freedom helps political freedom History suggests that capitalism is a necessary condition for political freedom. Clearly it is not a sufficient condition. Milton Friedman 33

34 Mechanism for overcoming discrimination and bringing people together The great virtue of a free market system is that it does not care what color people are; it does not care what their religion is; it only cares whether they can produce something you want to buy. It is the most effective system we have discovered to enable people who hate one another to deal with one another and help one another. Milton Friedman 34

35 Disadvantages Inequality Financial instability/economic cycle Monopoly Power Immobilities Environmental costs and externalities 35

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37 What is the alternative? Churchill s quote on democracy springs to mind. It has been said that democracy is the worst form of government except all the others that have been tried. 37

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39 Mix Economic System Pure forms of market & command economies do not exist. Today's market economies are mix of command & market. 39

40 Three characteristics of a market economy. 1. Protects private property. 2. Allows the free market & the laws of supply & demand to determine prices. 3. Driven by the motivation of the self-interest of individuals. 40

41 Characteristics of a command economy Allows the federal government to safeguard its people & its market. The government has a large role in the military, international trade & national transportation. The government s role in other areas depends upon the priorities of the citizens. The government may create a central plan that guides the economy. Other mixed economies allow the government to own key industries. Ex: aerospace, energy production, banking, health care, welfare & retirement programs. 41

42 Advantages All the advantages of a market economy. Distributes goods & services to where they are most needed. It allows prices to measure supply and demand. Rewards the most efficient producers with the highest profit. Customers get the best value for their dollar. 42

43 Encourages innovation to meet customer needs more creatively, cheaply or efficiently. Automatically allocates capital to the most innovative & efficient producers. Result producers can invest the capital in more businesses like them. Minimizes the disadvantages of a market economy 43

44 Disadvantages Take on all the disadvantages of the other types of economies. Depends on which characteristics the mixed economy emphasizes. Central planning of government industries also creates problems. The defense industry could become a governmentsubsidized monopoly or oligarchy system. That could put the country into debt, slowing down economic growth in the long run. 44

45 Businesses can lobby the government for more subsidies & tax breaks. The government could protect the free market so much that it doesn t regulate enough. Ex: Businesses that take on too much risk could receive taxpayer-funded bailouts. 45

46 U.S. Anyone can start a business & make nearly anything they want or provide any service. Government set minimum wage, overtime rules, minimum age, maximum age, license requirements. 46

47 China Mixed, but leans very heavy on the command side. Government owns most of the capital, land, & factories. Some people do own their own business. Manufacturing regions set in districts. Government planners set production goals. 47