Economic Systems Traditional Economy. We Need A System We know the there are limited resources and everybody needs to deal with the problem of scarcity.

Economic Systems

Traditional Economy

We Need A System

• We know the there are limited resources and everybody needs to deal with the problem of scarcity.

• So what kind of systems have we developed to deal with this?

Traditional Economy

Traditional Economy

• Overall goal is survival• It is about the group, what the individual

wants is really not important.

Advantages of a Traditional Economy

• Everyone knows their role.

• Life is generally predictable and stable.

• Almost everyone is taken care of, provided you are doing your part.

Disadvantages of a Traditional Economy

• This system resists change. It has been the same for thousands of years.

• This lack of progress leads to a lower standard of living.

Command Economy

Command Economy

• Government decides what goods and services are produced.

• Individual consumers are not considered• It is what the government thinks you need

Advantages In A Command Economy

• Everybody has a job.

• The Economy can change direction quickly.

Disadvantages In A Command Economy

• This system in not designed to meet the “wants” of consumers.

• The basic incentive of this system is to do just enough to meet quotas.

Market Economy

Market Economy

• It is all about the consumer and individual choice

• As a consumer you make decisions based on you own economic interests.

Advantages of a Market Economy

• High degree of individual freedom

• Relatively small degree of government interference (Mixed Economy)

• Seemingly unlimited variety of goods and services available to the consumers.

Disadvantages of a Market Economy

• The government does not provide for the basic needs of everyone.

• The government does not provide certain services that people value.

Which Economic System Are We?

• Mixed Economy

• Capitalism

• Based on 4 Important Principles - Private Property - Freedom of Choice - Profit - Competition

Fundamentals of a Market Economy

• Private property rights - rights of individuals and groups to own property.

• Market – any place or situation in which people buy and sell resources and goods and services.

• Property rights are enforced by law• Would this system work if buyers could not

trust sellers?

Limited Government

• Laissez faire – French term meaning “leave things along”.

• Should the government leave the markets alone?

• How does the government protect people from the market?

Voluntary Exchange

• Two parties involved make an exchange usually a good or service for money.

• This is guided by self interest

Consumer has the power

• A consumer can buy whatever they want.

• This creates competition within a market• Self Interest – Both the buyer and seller use

self interest to get what they want.

Specialization

• People do what they do best

• A teacher can make money by teaching but how can he or she get groceries for the week.

• Instead of growing them we go to the store with money earned by teaching and buy groceries.

Circular Flow Model

• This shows how households and business meet in a market economy.

Product Market

• Market for goods and services

• The suppliers of this market are businesses

• The goods are sold for money (profit) which keep the businesses going

Factor Market

• This market is where businesses go to get things for production

• This means the factors of production.We are included in this. We are the laborers, land owners, owners of capital. • We get income for doing this• Firms get resources from the product market

which are used to produce goods.

Mixed Economy

• Most common economic system in the world.• It has elements of all three systems• In a mixed economy one of the three systems

dominates and is the most prevalent in that economy.

• The U.S. is a mixed economy, which of the three systems does the U.S. use the most?

• How does the U.S. use each system?• Traditional • Command• Market

The free market has led to some interesting products!

What about other countries?

What’s the debate about Socialism?

Sweden

• Government pays for…• Child care ages 1-5• School ages 6-16• More schooling and college if you want to go• Health care• Dental• Pensions• Time off for raising a family

Sweden

• How do they pay for this?• Citizens in Sweden pay about 60% of their

income in taxes.

Politics of A Market Economy

• Politicians need your vote

• An almost endless amount of research goes into how people are likely to vote based on who they are, and how they live.

• If the researchers do their job correctly they will know who you will vote for before you enter the booth.