Chapter 2 Economic Systems Answering the 3 Basic Economic Questions Every economy is trying to find the best way to distribute scarce resources.

Chapter 2Chapter 2

Economic SystemsEconomic Systems

Answering the 3 Basic Economic Answering the 3 Basic Economic QuestionsQuestions

Every economy is trying to find Every economy is trying to find the “best” way to distribute scarce the “best” way to distribute scarce resourcesresources

Answering the 3 Basic Economic Answering the 3 Basic Economic QuestionsQuestions

What goods and services will the What goods and services will the economy produce?economy produce?

How should these goods and How should these goods and services be produced?services be produced?

Who is going to consume these Who is going to consume these goods and services?goods and services?

Kinds of Economic SystemsKinds of Economic Systems

Market Capitalism (a.k.a. Free Market Capitalism (a.k.a. Free Market, Free Enterprise)Market, Free Enterprise)TraditionalTraditionalMarket Democratic Socialism Market Democratic Socialism (a.k.a. Socialism)(a.k.a. Socialism)Authoritarian Socialism (a.k.a. Authoritarian Socialism (a.k.a. Communism)Communism)

Market CapitalismMarket Capitalism

Individuals own Individuals own resources and resources and means of means of productionproduction

Basically free Basically free from government from government controlcontrol

Adam Smith

Market CapitalismMarket Capitalism

Goal: to motivate Goal: to motivate people through people through economic rewardeconomic reward

People keep the People keep the profits from their profits from their hard workhard work

Adam Smith

Market CapitalismMarket Capitalism

CharacteristicsCharacteristics Private PropertyPrivate Property Freedom of ChoiceFreedom of Choice Self-InterestSelf-Interest Profit MotiveProfit Motive Supply and DemandSupply and Demand CompetitionCompetition Limited GovernmentLimited Government

Adam Smith

Market CapitalismMarket Capitalism

Examples : U.S., Examples : U.S., Australia, South Australia, South Africa, ChileAfrica, Chile

Political System : Political System : DemocracyDemocracy

Adam Smith

TraditionalTraditional

Economy does Economy does things as it things as it always hasalways has

TraditionalTraditional

Goal: to Goal: to maintain the maintain the same traditionsame tradition

Methods: Methods: resist new resist new technologiestechnologies

TraditionalTraditional

Examples: the Examples: the Amish in the U.S., Amish in the U.S., tribes living within tribes living within developed developed countriescountries

Political System: Political System: Tribal OrganizationTribal Organization

Market Democratic SocialismMarket Democratic SocialismSocialism – term Socialism – term implying implying redistributing redistributing money from the money from the rich to the poorrich to the poorGovernment owns Government owns major means of major means of production (ex. production (ex. Transportation, Transportation, Steel, Oil, etc.)Steel, Oil, etc.)

Market Democratic SocialismMarket Democratic Socialism

Goal: Equal Goal: Equal distribution of distribution of incomeincomeMethods Methods High TaxesHigh Taxes Benefits paid to Benefits paid to

low income low income individualsindividuals

Market Democratic SocialismMarket Democratic Socialism

Examples: Examples: Norway, Mexico, Norway, Mexico, CanadaCanada

Political System: Political System: Socialistic Socialistic DemocracyDemocracy

Authoritarian Socialism Authoritarian Socialism (Communism)(Communism)

Government Government owns all propertyowns all property

Total government Total government control of the control of the economyeconomy

Karl Marx

Authoritarian Socialism Authoritarian Socialism (Communism)(Communism)

Goals: equal Goals: equal distribution of distribution of income with no income with no social classessocial classes

Karl Marx

$1000 $10,000

I’ve made $8950!

$50 Pay

SurplusValue$9000

This really bites!

Authoritarian Socialism Authoritarian Socialism (Communism)(Communism)

MethodsMethods Working class Working class

revolts against revolts against the rich ownersthe rich owners

One political One political party controls all party controls all government government planningplanning

Karl Marx

Authoritarian Socialism Authoritarian Socialism (Communism)(Communism)

CharacteristicsCharacteristics Public OwnershipPublic Ownership Centralized Centralized

Decision MakingDecision Making Economic PlanningEconomic Planning Allocation by Allocation by

CommandCommand

Karl Marx

Authoritarian Socialism Authoritarian Socialism (Communism)(Communism)

Examples: Old Examples: Old Soviet Union, Soviet Union, Cuba, North Cuba, North KoreaKorea

Political System: Political System: Totalitarian Totalitarian CommunismCommunism

Karl Marx

Authoritarian Socialism Authoritarian Socialism (Communism)(Communism)

Key Terms from Key Terms from Communist Communist ManifestoManifesto Proletariat – the Proletariat – the

average worker average worker who (according to who (according to Marx) is exploited Marx) is exploited by capitalismby capitalism

Karl Marx

Authoritarian Socialism Authoritarian Socialism (Communism)(Communism)

Key Terms from Key Terms from Communist Communist ManifestoManifesto Bourgeoisie – the Bourgeoisie – the

rich, ruling class rich, ruling class that uses the that uses the proletariat to proletariat to make moneymake money

Karl Marx

Free Market vs. Central PlanningFree Market vs. Central Planning

Free Market Free Market AdvantagesAdvantages Self-Regulating – Self-Regulating –

produces what is produces what is needed and needed and wanted with no wanted with no government government interferenceinterference

Free Market Free Market DisadvantagesDisadvantages

Free Market vs. Central PlanningFree Market vs. Central Planning

Free Market Free Market AdvantagesAdvantages This self This self

regulating is a regulating is a result of people result of people acting on self-acting on self-interest and interest and incentivesincentives

Free Market Free Market DisadvantagesDisadvantages

Free Market vs. Central PlanningFree Market vs. Central Planning

Free Market Free Market AdvantagesAdvantages Competition Competition

holds prices to holds prices to the lowest levels the lowest levels while spurring while spurring new inventionnew invention

Free Market Free Market DisadvantagesDisadvantages

Free Market vs. Central PlanningFree Market vs. Central Planning

Free Market Free Market AdvantagesAdvantages Consumer Consumer

Sovereignty – Sovereignty – people are free people are free to buy what they to buy what they wantwant

Free Market Free Market DisadvantagesDisadvantages

Free Market vs. Central PlanningFree Market vs. Central Planning

Free Market Free Market AdvantagesAdvantages Encourages a Encourages a

very high degree very high degree of economic of economic growthgrowth

Free Market Free Market DisadvantagesDisadvantages

Free Market vs. Central PlanningFree Market vs. Central Planning

Free Market Free Market AdvantagesAdvantages

Free Market Free Market DisadvantagesDisadvantages Economic equity Economic equity

and security do and security do not occur in a not occur in a purely free purely free marketmarket

Free Market vs. Central PlanningFree Market vs. Central Planning

Free Market Free Market AdvantagesAdvantages

Free Market Free Market DisadvantagesDisadvantages Market has no Market has no

incentive to build incentive to build “public” goods “public” goods like roads or like roads or librarieslibraries

Free Market vs. Central PlanningFree Market vs. Central Planning

Free Market Free Market AdvantagesAdvantages

Free Market Free Market DisadvantagesDisadvantages Spillover costs Spillover costs

(negative (negative externalities) – externalities) – some problems some problems created that effect created that effect people who didn’t people who didn’t cause themcause them

Ex. - PollutionEx. - Pollution

Mixed EconomiesMixed Economies

Attempt to get the best out of free Attempt to get the best out of free market and central planningmarket and central planning

Government takes action to Government takes action to protect consumers when it feels it protect consumers when it feels it is necessaryis necessary

For Example, in the U.S.:For Example, in the U.S.:FDA screens food and FDA screens food and drug items to ensure drug items to ensure their safetytheir safety

Government breaks up Government breaks up harmful monopolies harmful monopolies under the Sherman under the Sherman Anti-Trust ActAnti-Trust Act

Government provides Government provides welfare benefits to welfare benefits to people who cannot find people who cannot find a joba job