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ECONOMIC SYSTEMS ECONOMIC SYSTEMS

Scarcity Means There Is Not Enough For Everyone Government must step in to help Scarcity Means There Is Not Enough For Everyone Government must step in to help allocate (distribute) resources

The 3 Major Production Questions • What to produce? • How to produce? • The 3 Major Production Questions • What to produce? • How to produce? • For whom to produce? We will classify economic systems into categories, based on how each of them attempts to answer these three questions.

Traditional Economy • The answers to the three major production questions are dictated by Traditional Economy • The answers to the three major production questions are dictated by ritual, habit, or custom.

Where might you find a Traditional Economy? Examples of Traditional Economies: • Inuit tribe Where might you find a Traditional Economy? Examples of Traditional Economies: • Inuit tribe • Some parts of South America • Some parts of Africa • Aboriginal tribes of Australia • Some island societies • All are remote

Traditional Economies Advantages? • Simple • Defined roles • Strong community • Self-sufficient • Traditional Economies Advantages? • Simple • Defined roles • Strong community • Self-sufficient • Specialization • • • Disadvantages? Less growth/wealth Less choice/variety Lack of motivation Uncertainty Resource Curse

Command Economy • The answers to the three major production questions are given by Command Economy • The answers to the three major production questions are given by some strong central authority (i. e. the government) • What is the “–ism” that comes to mind? • Communism – an economic system in which all factors of production are the property of the state. • Examples of Command Economies?

Examples of Command Economies • Cuba - ? ? Examples of Command Economies • Cuba - ? ?

Examples of Command Economies • North Korea Examples of Command Economies • North Korea

Command Economies Strengths • Able to plan • More equality(? ? ) • Safety Command Economies Strengths • Able to plan • More equality(? ? ) • Safety net • Can adjust quickly Weaknesses • Lack of incentive • …to work hard • …to innovate • • Low quality goods Less variety Corruption Difficult to plan successfully

Market Economy • Businesses and individuals act in their own best interest to answer Market Economy • Businesses and individuals act in their own best interest to answer the three major production questions. • What is the “–ism” that comes to mind? • Capitalism – an economic system in which individuals and businesses compete, with a minimum of government interference • Based on this definition, is the United States a “capitalist” economy? • “Laissez-Faire” – hands off

Market Economies Strengths • Economic freedom • Efficiency • Strong incentives • …to work Market Economies Strengths • Economic freedom • Efficiency • Strong incentives • …to work hard • • …to innovate • High quality goods • More variety • Weaknesses Unequal Consolidation of wealth/power Doesn’t provide for everyone No safety net

Mixed Economies • Mixed-Market • Socialism • Economies in Transition Kinda, but not really Mixed Economies • Mixed-Market • Socialism • Economies in Transition Kinda, but not really

Total Economic Freedom Little Economic Freedom Communism Total Government Control Socialism Mixed-Market Capitalism No Total Economic Freedom Little Economic Freedom Communism Total Government Control Socialism Mixed-Market Capitalism No Government Control

2017 Index of Economic Freedom: 2017 Index of Economic Freedom:

2009 Index of Economic Freedom: The Top 10 Rank Country Overall Change 1 Hong 2009 Index of Economic Freedom: The Top 10 Rank Country Overall Change 1 Hong Kong 90. 0 +0. 3 2 Singapore 87. 1 -0. 2 3 Australia 82. 6 +0. 4 4 Ireland 82. 2 -0. 3 5 New Zealand 82. 0 +1. 2 6 United States 80. 7 -0. 3 7 Canada 80. 5 +0. 3 8 Denmark 80. 0 +0. 4 9 Switzerland 79. 4 -0. 1 10 United Kingdom 79. 0 -0. 5 http: //www. heritage. org/Index/

Bottom 8 Bottom 8

Role Players in the Mixed-Market Economy • Consumers • Producers • Government – What Role Players in the Mixed-Market Economy • Consumers • Producers • Government – What 5 roles does the government play in our economy? • Consumer • Producer • Protector • Regulator • Provider

7 Economic & Social Goals of Mixed. Market Capitalism in the U. S. 1. 7 Economic & Social Goals of Mixed. Market Capitalism in the U. S. 1. 2. 3. 4. 5. 6. 7. Economic Freedom Economic Equality …of opportunity** Economic Security Economic Growth Economic Efficiency Price Stability § inflation and deflation Full Employment § Does this mean everyone has a job? § No. There is a Natural Rate of Unemployment

Characteristics of Free Enterprise Capitalism • Economic Freedom • Voluntary Exchange – who has Characteristics of Free Enterprise Capitalism • Economic Freedom • Voluntary Exchange – who has more power, producers or consumers? • Consumer Sovereignty: The consumer drives the market – DOLLAR VOTES • “The customer is always right!” • Private Property Rights • The Tragedy of the Commons – solutions? • Profit Motive/Self-interest • Competition • Markets and Prices • Specialization/Division of Labor

Capitalism Communism Capitalism Communism

Capitalism Communism Capitalism Communism

“From each according to his ability, to each according to his needs!” • Karl “From each according to his ability, to each according to his needs!” • Karl Marx • Critique of the Gotha Programme, 1875

Communism 200 words - Communism: How/Why does it rise? How/Why does it fail? How Communism 200 words - Communism: How/Why does it rise? How/Why does it fail? How could it succeed?

Characteristic Capitalism Communism Primary Economic Goal Economic Freedom Economic Equality Basis of Economy Competition Characteristic Capitalism Communism Primary Economic Goal Economic Freedom Economic Equality Basis of Economy Competition Cooperation / Collectivization Resource Allocation Supply & Demand Ownership of F. O. P. Private Property Public Property Profit Motive Patriotism: The Good of Community Motivation Government Planning

Why Doesn’t It Work? • Incentive Problem • Average Test Scores Example • Soviet Why Doesn’t It Work? • Incentive Problem • Average Test Scores Example • Soviet Tanks • Coordination Problem • 30 kids in classroom vs. 400 kids in auditorium • In one word, why doesn’t it work? GREED

“As for me, I am not a Marxist. ” Karl Marx “As for me, I am not a Marxist. ” Karl Marx

When CAN It Work? Opt In Small Groups When CAN It Work? Opt In Small Groups

Unit 2 Review Guide – Topic List Three Production Questions Traditional Economies o Strengths Unit 2 Review Guide – Topic List Three Production Questions Traditional Economies o Strengths o Weaknesses Market Economies o Strengths o Weaknesses Command Economies o Strengths o Weaknesses Roles of Government in Mixed Market Goals of Mixed Market Capitalism Voluntary Exchange Private Property Rights o Tragedy of the Commons Communism o Rise/Fall o When can it work? Relevant Textbook Sections: o Chapter 2