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.
