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