Answering the Three Economic Questions - Download as PowerPoint by Adela Sanders

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									“Introduction to Economic Systems”
        Critical Questions

• What key economic questions must
  every society answer?
• What basic economic goals do societies
• What types of economic systems exist
What is an economic system?

 The method used by a
 society to produce and
  distribute goods and
The Three Questions that Determine
   a Societies Economic System
Because ALL economic resources are scarce,
  every society must answer three questions:
   – What goods and services should be
      • Guns or butter?
   – How should these goods and services be
      • What combination of factor resources
        should we use?
   – Who consumes these goods and
      • How will income be distributed?
                    Economic Goals
Societies answer the three economic questions based on their goals
                             and values.
      Economic Goals
                   Economic Goals
      Economic efficiency   Making the most of resources

       Economic freedom       Freedom from government intervention in
                              the production and distribution of goods
                              and services

      Economic security       Assurance that goods and services will be
      and predictability      available, payments will be made on time,
                              and a safety net will protect individuals in
                              times of economic disaster

      Economic equity        Fair distribution of wealth
      Economic growth        Innovation leads to economic growth, and
      and innovation         economic growth leads to a higher
                             standard of living.

      Other goals             Societies pursue additional goals, such as
                              environmental protection.
         Four Economic Systems
  An economic system is the method used by a society
     to produce and distribute goods and services.
Traditional economies rely
on habit, custom, or ritual to   In a market economy
decide what to produce,          economic decisions are
how to produce it, and to        made by individuals and
whom to distribute it.           are based on exchange, or
In a centrally planned
economy the central              Mixed economies are
government makes all             systems that combine
decisions about the              tradition and the free
production and                   market with limited
consumption of goods and         government intervention.
    Comparing Economic Systems
Economic System         Who answers the 3 ?’s

•   Traditional         •   Custom
•   Market              •   Individuals
•   Centrally Planned   •   Central Government
•   Mixed               •   Individuals with some
   System Slogans

•Create a “bumper sticker” for
one of the economic systems
•Must be have visual appeal,
creativity and neat.
      Traditional System
• A traditional system relies on habit,
  custom or ritual to decide what to
  produce, how to produce it and to
  who to distribute it.
• Agricultural and hunting societies
• There is little room for innovation or
• They tend to lack modern conveniences
  and have a low standard of living.
• Close knit communities with focus on the
  family unit.
       "In 1492, Columbus sailed the ocean
blue" . . . and made the first contact with the
"Indians." For Native Americans, the world after
1492 would never be the same. This date marked the
beginning of the long road of persecution and
genocide of Native Americans, our indigenous
      Genocide was an important cause of the
decline for many tribes."By conservative estimates,
the population of the United states prior to
European contact was greater than 12 million. Four
centuries later, the count was reduced by 95% to
237 thousand.
      Why Do Markets Exist?
Markets exist because none of us produces
 all the goods and services we require to
        satisfy our needs and wants.
A market is an       Specialization is the
arrangement that     concentration of the
allows buyers and    productive efforts of
sellers to           individuals and
exchange goods       firms on a limited
and services.        number of activities.
                      Free Markets
                 Circular Flow Diagram of a Market Economy

• In a free market                             monetary flow

  economy, households                          physical flow

  and business firms use
  markets to exchange
  money and
  products.       Households                                   Firms

• Households
  own the factors
  of production
  and consume goods and                        physical flow
  services.                                    monetary flow
    Adam Smith (1723-90)
• Scottish social philosopher and professor
  that wrote one of the most influential books
  on market economics.
• His book, “An Inquiry into the Nature and
  Causes of the Wealth of Nations”, was
  published in 1776. The book took 10 years
  to write and consisted of 5 volumes.
• The book describes the way in which
  markets function without government
  intervention. A “laissez faire” approach.
Adam Smith and the Invisible Hand
• In every transaction, the buyer and seller
  consider only their self-interest, or their own
  personal gain. Self-interest is the motivating
  force in the free market.
• Producers in a free market struggle for the
  dollars of consumers. This is known as
  competition, and is the regulating force of the
  free market.
• The interaction of buyers and sellers, motivated
  by self-interest and regulated by competition,
  all happens without a central plan. This
  phenomenon is called “the invisible hand of the
       Advantages of the
Economic Efficiency Free Market
•  As a self-regulating
   system, a free         Economic Freedom
   market economy is      • Free market economies
   efficient.               have the highest degree of
Economic Growth             economic freedom of any
                            economic system.
• Because
   competition            Additional Goals
   encourages             • Free markets offer a
   innovation, free         wider variety of goods
   markets encourage        and services than any
   growth.                  other economic system.
Centrally Planned Economies

  The government,or
  central authority
      controls the
Organization of Centrally Planned Economies
 In a centrally planned economy, the government
   owns both land and capital. The government
 decides what to produce, how much to produce,
             and how much to charge.

Socialism is a social
                           Communism is a political
and political philosophy
                           system characterized by a
based on the belief
                           centrally planned economy
that democratic means
                           with all economic and
should be used to
                           political power resting in the
distribute wealth
                           hands of the government.
evenly throughout a
                           Communist governments are
                           authoritarian in nature.
 • German philosopher
 • Developed radical approach to understanding
   and coping with the problems that occurred in
   free market systems
 • Published the Communist Manifesto in 1848
   with close friend Frederick Engels.
 • In his pamphlet he argued that history is a
   series of class struggles between the rich
   capitalists and the working class “proletariat”.
 • He believed that eventually workers needed to
   unite and revolt against the capitalists. This
   revolution would then breed a classless society.

KARL MARX(1818-1883)
Frederick Engels   Karl Marx
Philosophy Becomes Reality
 • In 1917, the ideas proposed by Marx
   would become a reality.
 • The Bolshevik Revolution, led by
   communist Vladimir Lenin, would result
   in a centrally planned society.
The Creation of the Soviet Union
 The Soviet Experiment
• Land, labor and capital was all controlled by
  the state. The best resources were allocated to
  to the armed forces, space program, and
  production of capital goods.
• Government committees decided the quantity,
  process and distribution of all products.
• The government created large state-owned
  farms and collectives to produce all agricultural
• Under this system there was little incentive to
  produce, and the Soviet Union saw a rapid
  decline in the production of agricultural goods.
        The Meaning Behind the Flag
                  The hammer and sickle originate
                  from the unique Russian unity of the
                  peasants (the sickle) with the workers
                  (the hammer) who together formed
                  the Soviet Russian state.
• The Red field is symbolism of the blood that has
  been spilt by workers the world over in the fight for
  their emancipation.
• The single yellow star is the representation of the
  life and immense energy of the sun, empty because
  within is the blood or production of workers
   Centrally planned
economies face problems
 of poor-quality goods,
     shortages, and
diminishing production.
Other Problems in Centrally
    Planned Economies
• Performance falls short of the set ideals
• Fail to meet consumer needs and wants
• Little individual incentives to work hard
• Lack of innovation
• Expensive and inflexible government
  structure needed to manage the system
• Sacrifice of individual freedoms to
  pursue societal goals
  Mixed Economies

• It is doubtable that any
  nation can exist
  successfully under a pure
  centrally planned economy or a
  pure market economy.
• Most economies mix features of
  both systems.
 An economic system that permits the conduct of business with minimal
  government intervention is called free enterprise. The degree of
    government involvement in the economy varies among nations.
 Nations are placed on a continuum (a range with no clear divisions) of
 mixed economies. On one end are centrally planned economies and
          on the opposite end are free markets economies.
 Continuum of Mixed Economies

 Centrally planned                                                                                                         Free market
                   Iran                          South Africa                France                United Kingdom       Hong Kong

         North Korea               China                   Botswana                            Canada                   Singapore
                 Cuba                   Russia           Greece               Peru                      United States

Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick

             Comparing Mixed Economies

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