Alternative Economic Systems Learning Plan 4 Alternative

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Alternative Economic Systems

• Learning Plan 4

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Alternative Economic Systems

• Questions
• 1. Why does the scarcity problem force all
  societies to answer the questions what, how, and
  for whom?
• 2. How can economies be classified?
• 3. What are the characteristics of an command
  socialist economy?
• 4. What are some problems that command socialist
  economies face?

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Economic Systems

• Economic System is the institutional means
  through which resources are used to satisfy human
  wants.

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Economic Systems

• Unlimited wants/ scarce resources
• Rules
• Channeling competition
• Resolving conflict
• Laws
• Customs

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Economic Systems

• 1. Capitalism. An economic system in which
  individuals own productive resources these
  individuals can use the resources in whatever
  manner they choose, subject to common legal
  restrictions.
• A. Property rights. The right of an owner to
  use and to exchange property.

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Economic Systems

• Socialism. An economic system in which the state
  owns the major share of productive resources
  except labor. Socialism also usually involves
  the redistribution of income.

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Economic Systems

• Communism. An economic system in which the state
  has disappeared and in which individuals
  contribute to the economy according to their
  productivity and are given incomes according to
  their needs.
• In pure communism, we would see the absence of
  economic class distinctions.
• Centrally planned (command) economies.

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Economic Systems

• Two classifications
• 1. Market System. A system in which individuals
  own the factors of production and decide
  individually how to use them a system with
  decentralized economic decision making

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Economic Systems

• 2. Command System. A system in which the
  government controls the factors of production and
  makes all decisions about their use and about
  the distribution of income.

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Economic Systems

• No matter what the system, the fundamental
  economic problem of scarcity must be solved.
• Every economy faces opportunity costs in making
  decisions.

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3 Basic Economic Questions

• Resource Allocation
• The assignment of resource to specific uses
  determining what will be produced, how it will
  be produced, and for whom it will be produced.

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What, How, And For Whom To Produce Is The
Function of Price

• What
• What is produced is determined by the dollar
  votes that we cast for things and by the dollar
  costs of producing those things

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What, How, And For Whom To Produce Is The
Function of Price

• Whom
• For whom to produce is determined by the price
  the market creates for resources that people
  own-things like land, capital, and our labor
  services.

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What, How, And For Whom To Produce Is The
Function of Price

• How
• How goods are produced is determined as business
  firms compare the relative prices of
  resources-land, labor, capital, and
  entrepreneurship
• Firms want to develop lowest-cost combination of
  resources

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Least-cost Combination

• The level of input use that produces a given
  level of output at minimum cost.

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Market Prices

• Market prices communicate crucially important
  information
• 1. To consumers about product availability.
• 2. To producers about consumer preferences
• 3. To individuals above the relative value of
  particular kinds of knowledge and skills

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Market Prices

• Prices ration resources and goods
• 1. When something is scarce, the quantity of is
  insufficient to allow everyone to have as much as
  they like.
• 2. There must be some method of determining who
  gets how much of scarce things

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Market Prices

• Price acts as a message to the market
  participants.
• The price system is the messenger.
• 1. The price system delivers a message about
  changing market conditions.
• 2. The price system delivers does not create the
  changing market conditions.

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Extreme Economic SystemsMarket Capitalism and
Command Socialism

• Market Capitalism In Theory
• 1. Private property rights exists, are legal,
  and are upheld by the judicial system

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Market Capitalism In Theory

• 2. Prices are allowed to seek their own level as
  determined by the forces of supply and demand.
  In this sense, pure capitalism is a price system.

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Market Capitalism In Theory

• 3. Resources, including human labor, are free to
  move in an out of industries and geographic
  locations. The movement of resources follows the
  lure of profits-higher expected profits create an
  incentive for more resource to go where those
  profits might occur.

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Market Capitalism In Theory

• 4. Risk takers are rewarded by higher profits,
  but those whose risks turn out to be bad business
  decisions suffer the consequences directly in
  terms of reduced wealth.

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Market Capitalism In Theory

• 5. Decisions about what and how much should be
  produced, how it should be produced and for whom
  it should be produced are left to the market. In
  a pure market capitalist system, all decisions
  are decentralized and made by individuals in a
  process of spontaneous coordination throughout
  the economy.

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Laissez Faire

• An economic system in which the government
  minimizes its activity within the economy.

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Three of Attributes of Market Capitalism

• Prices
• Profits
• Private Property

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Government Role in Capitalist System

• Limited to certain goods
• Legal framework

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Command Socialism in Theory

• Command Socialism. An economic system in which
  there is virtually no private property and the
  state owns virtually all the factors of
  production. Decisions about what and how much,
  by whom and for whom are decided by command from
  a central authority.

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Command Socialism in Theory

• 1. Most of the major factors of productions are
  owned by the state. Private property rights are
  strictly limited to small tools that an
  individual needs for an occupation. Land,
  factories, and major machinery are never
  privately owned.
• 2. Most prices are set by the state rather than
  by the forces of supply and demand.

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Command Socialism in Theory

• 3. The movement of resources, including labor,
  is strictly controlled. Resources typically move
  only when dictated by a centralized planning
  authority.
• 4. Economic decisions about what and how much,
  how, and for whom are all made by the state
  through its central planning agencies and other
  administrative units.

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Command Socialism in Theory

• 5. Little individual risk taking is allowed
  rather, risk taking in the form of new ventures
  is undertaken by the state. All citizens benefit
  from successful risk taking, and all citizens pay
  for unsuccessful risk taking, but not directly
  through immediate reduction in individual income
  and wealth.

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Command Socialism in Theory

• 6. Taxation is often used to redistribute
  income.

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Economic Planning

• Does economic planning occur in a centralized
  command economy and not in a decentralized market
  economy?

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Incentive Structure

• The motivational rewards and costs that
  individuals face in any given situation.
• Each economic system has its own incentive
  structure.

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Mixed Economies

• An economic system in which decisions about how
  resources should be used are make partly by the
  private sector and partly by the government, or
  the public sector.
• What is the future of mixed economies?

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China Past, Present, and Future
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Movement Toward The Market In Russia
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Changes In Other Parts Of The World