Economic Systems

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					Economic Systems

   Chapter 2 Notes
Economic Systems
   An economic system is the method used
    by a society to produce and distribute
    goods and services
    • Societies and nations are forced to develop
      an economic system in order to deal with the
      problem of scarcity in what they believe to be
      the best possible way
Three Economic Questions
   What goods and services should be produced?
    •   National defense
    •   Food
    •   Education
    •   Public health and welfare
    •   Consumer goods
         •   I-pods
         •   Shoes
         •   TV’s
         •   Automobiles
    •   Specialization should take precedence
         • A society is most efficient when producing what is specializes in
           and trading with other nations
    •   Who decides?
         •   Markets or Government
Three Economic Questions
   How should goods and services be
    • Electricity: Wind Power, Solar, Coal (How to
    •   Large numbers of employees
    •   Few employees and more technology
    •   Private enterprise or big government
Three Economic Questions
   Who consumes goods and services?
    • Who gets to buy the big house on the hill and
        who gets the apartment?
    •   Who eats at restaurants like Morton’s, Del
        Frisco’s and Ruth’s Chris and who eats hot
        dogs for breakfast, lunch, and dinner?
    •   How should income be distributed?
         • Through trade, by how much one produces, or
          does the government distribute a society’s wealth?
Economic Goals
   How do different societies answer these
    three questions?
    • Based on the importance they attach to
      various economic goals
Economic Goals
   Economic efficiency
    • Resources are always scarce
       • Try to maximize what they can get for the
         resources that they have to work with
       • Produce products that people want to buy
       • Want to cut waste and get your products to the
Economic Goals
   Economic freedom
    •   Can you: buy what you want, sell what you want, open
        your own business, earn profits, work for whomever
    •   Want to be able to produce products and earn an
         • What if the government created laws that kept you from
           earning an income?
    •   Want to be able to purchase certain items
         • Automatic weapons?
    •   The more “free” a country is the more prosperity it
Economic Goals
   Economic Freedom
    •   The more economic freedom a country enjoys, the
        more prosperous it is:
         • USA                GDP Per Capita: $46,716
         • Hong Kong          GDP Per Capita: $43,924
         • Canada             GDP Per Capita: $36,444
         • Australia          GDP Per Capita: $35,677
         • Venezuela          GDP Per Capita: $12,804
         • Iran               GDP Per Capita: $11,666
         • Cuba               GDP Per Capita: $9,500
         • North Korea        GDP Per Capita: $????
Economic Goals
   Economic security and predictability
     • Uncertainty is never a good thing
          •   Will I have a job next month?
          •   Will I get a bonus/raise this year?
          •   Will the bank have money to cash my check?
          •   What will health care cost next year?
          •   Will my taxes go up?
          •   Will it cost more to produce goods and services?
          •   What will the law be next year?
          •   What will the retirement age be next year?
          •   What will the stock market look like next year?
     •   Businesses and households hold back purchasing and investing
         when they are not sure what the future will be like
     •   The major problem with government involvement in the economy
         is that no one knows what it will do next; it creates economic
         insecurity and unpredictability
Economic Goals
   Economic equity
    •   How should a society divide its economic pie
         •   Everyone receive equal pay?
               •   What if a person is unwilling or unable to produce?
               •   What if a person becomes ill?
               •   What if one person works harder than another?
               •   What if one person gains more human capital?
         •   Some earn great wealth while others do not?
         •   Will you work harder so that your neighbor can bring in more
         •   Will you pay for your neighbor’s mortgage? Health insurance?
         •   What do you owe to your neighbor?
         •   What does Bill Gates owe to you?
    •   What is fair?
Economic Goals
   Economic growth and innovation
    •   In order for a nation to improve its standard of living (level of
        economic prosperity), its economy must continue to grow
          • Economy must be able to provide jobs, services, income, etc
            for a growing population
    •   The ability to earn a profit and economic freedom provide for
        economic growth and innovation
    •   New technology increases the efficiency of production and brings
        about new goods and services
          • All done through innovation
          • Innovation has come from the brilliant minds of individuals
            seeking a profit
          • Has not happened with government stimulus
    •   Too much government involvement not only brings about
        unpredictability but also less innovation and slow economic growth
Economic Goals
   Additional goals
    • Environmental protection
    • Employment
    • Universal medical care
    • Green technologies
Types of Economic Systems
   Traditional economies
   Market economies
   Command economies (centrally planned
   Mixed economies
Economic Systems: Traditional
   Traditional economies
    • Relies on habit, custom, or ritual to decide
        what to produce, how to produce, and to
        whom to distribute it
    •   Little room for innovation or change
    •   Revolves around family
    •   Work tends to be divided along gender lines
    •   Work to support groups, not individuals
    •   Agriculture and hunting main practices
Economic Systems: Market
   Market economies (Free markets or Capitalism)
    •   Economic decisions made by individuals and are based on
        exchange, or trade
    •   Individual choices determine what gets made and how, as
        well as who consumes the goods and services
    •   Competition is key
         •   Acts as primary regulator of economy
                 •   Businesses compete for customers; therefore they must offer the
                     best product at the best price all of the time
    •   Profit
         •   Primary incentive motivating a manufacturer to sell a product
Economic Systems: Market
   The Free Market
    • Market: an arrangement that allows buyers
      and sellers to exchange things
       • Allow us to exchange the things we have for the
        things that we want
Economic Systems: Market
   Free market economy
    • Individuals and privately owned businesses
       • Own the factors of production (land, labor, capital)
       • Make what they want
       • Buy what they want
       • Answer the three economic questions
          • What to produce
          • How to produce
          • Who consumes that which is produced
Economic Systems: Market
   Free market economy: households and firms
    •   Main players in the free market economy
         • Households
            •   Person or group of people living in the same residence
            •   Own the factors of production
            •   Consumers of goods and services
         • Firms (business)
            •   An organization that uses the resources to produce a
            •   Transform “inputs” (f.o.p.) into “outputs” (products)
Economic Systems: Free Market
Circular Flow Model
Economic Systems: Market
   Free market economy: nature of the marketplace
     • Self-interest (Adam Smith)
          •   Buyer and seller consider their self-interest when taking part in a
                •   Motivating force behind the market
                •   What is best for me
     •   Competition (Adam Smith)
          •   Firms compete for business in order to increase profits
                •   Lower prices
                •   Better products
                •   More innovation
                      • No regulators needed
     •   Invisible hand (Adam Smith)
          •   Competition, self-interest, and supply and demand working together
                •   Self-interest causes consumers to purchase certain goods
                •   Competition causes more production, lower prices
                •   Supply and demand causes resources to be moved to where they are most
                    needed (demanded)
Economic Systems: Market
   Advantages of the free market
    •   Economic efficiency
         • Producers make only what consumers want, when they
           want it, and at a price that they are willing to pay
    •   Economic freedom
         • Workers work where they want, firms produce what they
           want, individuals consume what they want
    •   Economic growth
         • Competition encourages innovation, innovation leads to
    •   Additional goals
         • Wide variety of goods and services
         • Consumers decide what gets produced
Economic Systems: Centrally
Planned Economy
   Command economies (centrally planned
    • Government alone decides how to answer all
        three key economic questions
    •   Central bureaucracy makes the decisions and
        is responsible for providing the raw materials
        and the workers
Economic Systems: Centrally
Planned Economy
   Centrally Planned Economies: Government
    Control of Factor Resources and Production
    •   Government owns both land and capital
    •   Government makes all economic decisions
    •   By controlling where individuals work and how much
        they make, government owns the labor as well
    •   Government decides what to produce, how much to
        produce, and how much to charge
Economic Systems: Centrally
Planned Economy
   Centrally planned economies (types):
    • Wealth should be distributed evenly
        throughout a society
    •   Economic equality is only possible when the
        public controls the centers of economic power
    •   Government often owns major industries
        (utilities, transportation, telecommunications,
        banks, etc.)
Socialist Venezuela
Socialist Venezuela
Socialist Venezuela
Economic Systems: Centrally
Planned Economy
   Centrally planned economies (types):
    • All economic and political power resting in the
        hands of the central government
    •   Communist governments are authoritarian
         • Demand strict obedience from its citizens
         • Do not allow freedom of judgment and action
    • Government dominated by a single party or
Communist Cuba
Communist Cuba
Communist Cuba
Communist Cuba
Communist Cuba
Communist Cuba
Soviet Communism
Soviet Communism
Soviet Communism
Economic Systems: Centrally
Planned Economy
   Centrally planned economies: Problems
    •   Poor quality
    •   Shortages
    •   Performance almost always falls short of desired
    •   Innovation is not rewarded, therefore growth and
        change is unlikely
    •   Individual freedoms are sacrificed in order to meet
        societal goals
    •   Just look at: Greece, North Korea, Cuba, Venezuela,
        Iran, etc
Economic Systems: Mixed
   Mixed economies
    • Market-based economic system where
     government plays a limited role
Economic Systems: Mixed
   The rise of mixed economies
    • Governments come into play to:
       • Enforce contracts
       • Protect property rights
Economic Systems: Mixed
   Balancing control and freedom
    •   What are you willing to give up to meet your goals?
         • Pay taxes for protection?
         • Provide money for people without jobs?
         • Provide an education for all?
         • Set job-safety guidelines?
         • Create a minimum wage?
         • Pay for someone else’s benefits?
         • Pay for your neighbors house?
         • Pay for someone else’s health care?
Economic Systems: Mixed
   Circular flow model of a mixed economy
    •   Governments purchases land, labor, and capital from
         • Millions of people work for the government
    •   Governments purchase goods and services
         • Buildings and office supplies
    •   Governments collect taxes from both households and
         • Transfer money back to business and individuals
             •   Worker disability
             •   Government subsidies
             •   Social Security
Economic Systems: US
   United States economy
     • Free enterprise economy
     • Minimal government interference
          • Provide vital services
          • Promote general welf are
     • Foreign investment is encouraged
     • Free trade encouraged
   US economic system changing as we speak
     • Government take-over of:
          • Banks
          • Insurance companies
          • Auto companies
          • Energy
          • Health care
   Failure of government run systems in the US
     •   Social Security (Government has had over 70 years to get this one to work, it is broke)
     •   Fannie Mae (will cost taxpayers approximately $1 trillion to bail out)
     •   Freddie Mac (will cost taxpayers approximately $1 trillion to bail out)
     •   USPS (Over 230 years of service and still can’t figure it out)
     •   Amtrak (Never been profitable)
     •   Medicare (Broke)
     •   “Great Society” (Supposed to eliminate poverty; not yet even after 45 years and a trillion dollars)
     •   Stimulus bill of 2009 (Unemployment will not reach 8%; it hit 10.1%)
     •   “Cash for Clunkers” (Used cars more expensive today)