“Introduction to Economic Systems” Critical Questions • What key economic questions must every society answer? • What basic economic goals do societies have? • What types of economic systems exist today? What is an economic system? The method used by a society to produce and distribute goods and services 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 produced? • Guns or butter? – How should these goods and services be produced? • What combination of factor resources should we use? – Who consumes these goods and services? • 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 a safety net will protect and predictability 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 Environmental protection, variety 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 trade. In a centrally planned economy the central Mixed economies are government makes all systems that combine the decisions about the free market with limited production and government intervention. consumption of goods and services. Comparing Economic Systems Economic System Who answers the 3 ?’s • Traditional • Custom • Market • Individuals • Centrally Planned • Central Government • Mixed • Individuals with some government involvement Traditional System The Free Market System (a.k.a. Capitalism) 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 arrangement that allows buyers and sellers to exchange goods and services. Specialization is the concentration of the productive efforts of individuals and firms on a limited 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 • “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776) – 10 years to write – 5 volumes • “Laissez faire” • The Invisible Hand – Self Interest (Motivating Force) – Competition (Regulating Force) Advantages of the Economic Efficiency Free Market As a self-regulating system, a free Economic Freedom market economy is Free market economies have efficient. the highest degree of Economic Growth economic freedom of any economic system. Because competition encourages Additional Goals, i.e. variety innovation, free Free markets offer a wider markets encourage variety of goods and services growth. than any other economic system. Centrally Planned Economies The government,or central authority controls the economy. 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 society. authoritarian in nature. • German philosopher • Radical approach to fix the problems in free market systems • Communist Manifesto (1848) with Frederick Engels. • 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 create a classless society. KARL MARX(1818-1883) Frederick Engels Karl Marx The Soviet Union The Soviet Experiment • Factors of production controlled by the state • Resources= armed forces, space program, capital goods • Government committees decided the quantity, process and distribution of products • The government created large state-owned farms and collectives • Little incentive to produce, decline in the production of goods. Problems in Centrally Planned Economies • Poor-quality goods, shortages, and diminished production • Fail to meet consumer needs and wants • Little individual incentives to work • Lack of innovation • Expensive and inflexible government structure • Sacrifice of individual freedoms Mixed Economies • It is doubtful 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 Chapter 3 and 13 American Free Enterprise Understanding America’s Economic Structure Tradition of Free Enterprise The Economic Trade-off (Freedom vs. Protection): Rights and Roles of the American Consumer • Rights • Property Rights • Contracts • Taxation • Roles • Consumer • Voter The Role of Government 1. Protect the Public Interest 2.Provide Information 3. Promote Growth and Stability Key Indicators Poverty Inflation Employment Gross Domestic Product Gross Domestic Product The main indicator used to determine overall health of the economy is gross domestic product (GDP) which is the dollar value of all final goods and services produced within a country’s borders in a given year. This will allow them to better determine upcoming business cycles to determine prosperity, recession or depression. Limitation of GDP • Non-market activities • Underground economy • Quality of life GDP vs. GNP Annual income earned by US owned firms and citizens. Types of Unemployment 1. Frictional Unemployment- Occurs when people change jobs, get laid off from their current jobs, take some time to find the right job after they finish their schooling, or take time off from working for a variety of other reasons 2. Structural Unemployment- Occurs when workers' skills do not match the jobs that are available. Technological advances are one cause of structural unemployment 3. Seasonal Unemployment- Occurs when industries slow or shut down for a season or make seasonal shifts in their production schedules 4. Cyclical Unemployment- Unemployment that rises during economic downturns and falls when the economy improves Unemployment Rates The Bureau of Labor Statistics determines the unemployment rate (% of the labor force that is unemployed) each period Getting Everyone To Work!!!! • Economists generally agree that in an economy that is working properly, an unemployment rate of around 4 to 6 percent is normal. • Sometimes people are underemployed, that is working a job for which they are over- qualified, or working part-time when they desire full-time work. • Discouraged workers are people who want a job, but have given up looking for one. Full employment is the level of employment reached when there is no cyclical unemployment. Going….UP!!!!!!!!!! • Inflation is a general increase in prices. • Inflation limits purchasing power (the ability to purchase goods and services). To Market, To Market • The consumer price index (CPI) is computed each month by the Bureau of Labor Statistics. • This is a measure of the price of a typical consumers “market basket”. What is in the basket? There are over two hundred categories of products that are included in the basket. These categories fall under 8 major groups: FOOD AND BEVERAGES HOUSING APPAREL TRANSPORTATION MEDICAL CARE RECREATION EDUCATION AND COMMUNICATION OTHER GOODS AND SERVICES Inflation Theory 1. Quantity Theory 2. Demand-Pull 3. Cost-Push What’s the big deal? The three main problems caused by inflation are: –Reduced Purchasing Power –Erosion of Interest Income –Erosion of Wages/Income The Poverty Problem Although the free market is the most successful economic system at producing wealth—distribution is HIGHLY uneven. The poverty threshold is an income level below what is needed to support families or households. What is the current threshold?!?!?!?!?!?!!?? POVERTY...THE FORGOTTEN STATE Who does the government provide a safety net for? Elderly Disabled Children Poor Redistribution Programs Type of Program Description Example Example Cash Transfers Direct payment of cash to qualifying Temporary Unemployment individuals Assistance to Compensation Needy Families In-Kind Benefits Goods and services for free or Food Stamps Subsidized reduced prices housing Medical Benefits Health insurance to those that cannot Medicare Medicaid provide it for themselves Education Benefits Federal, state, and local government Pell Grants Head Start all provide money for the poor and disabled to ensure all people receive educational opportunities.
Pages to are hidden for
"Answering the Three Economic Questions - nazaretheconomics"Please download to view full document