Economic Systems

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Economic Systems

• Chapter 2 Section 1
• Answering the Three Economic Questions

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Economic Systems

• Objectives
• Identify the three key economic questions of
  what to produce, how to produce, and who
  consumes what is produced.
• Analyze the societal values that determine how a
  country answers the three economic questions.
• Explain the characteristics of traditional,
  command, and market economies and describe the
  societal values that influence them.

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Economic Systems

• Scarcity is that we cannot have all that we want
  or need.
• In some places in the world, people cannot even
  meet their basic needs for food, clothing, and
  shelter.
• Scarcity forces societies and nations to answer
  some hard economic questions.
• Different economic systems have evolved in
  response to the problem of scarcity.

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Economic Systems

• Economic System the method used by a society
  to produce and distribute goods and services.
• Which economic system a society employs depends
  on that societys goals and values.

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Economic Systems

• Three KEY Economic Questions
• Because economic resources are limited every
  society must answer three key economic questions.
• 1. What to produce?
• 2. How to produce?
• 3. For whom to produce?

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Economic Systems

• Three KEY Economic Questions
• 1. What goods and services should be produced?
• gt Individuals in every society must decide what
  to produce in order to satisfy societys needs
  and wants.
• gt In todays society nations have to decide
  how much of their total resources to devote to
  national defense, education, public health,
  welfare, or consumer goods.
• gt Because of our limited resources, each
  production decision that a society must make
  comes at an opportunity cost.

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Economic Systems

• Three KEY Economic Questions
• 2. How should these goods and services be
  produced?
• gt Next question is how to use our resources to
  produce goods and services.
• gt Do we produce electricity with oil, solar
  power, or nuclear power.
• gt Should we produce food on large corporation
  farms or on small family farms?
• gt Before the introduction of modern farming
  equipment - - it took 56 worker-hours to farm
  one acre of land (produced 15 bushels of
  wheat)In todays mechanical world - - it
  takes it takes 2.9 worker-hours to farm one
  acre of land (produce 40 bushels of wheat)

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Economic Systems

• Three KEY Economic Questions
• 3. Who consumers these goods and services? gt By
  the 1990s, the top manufacturers in the US
  were launching 13 new products each day
  filling the store shelves even more that they
  were.
• gt Stores on average carry 30,000 different
  items compared to 3,000 items some 50 years
  ago.
• gt How do we divide up all these goods that are
  produced each year?

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Economic Systems

• Three KEY Economic Questions
• 3. Who consumers these goods and services?
• gt Who gets to drive a luxury car
• Ferrari 430 and who can only afford a bus
  pass.

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Economic Systems

• Three KEY Economic Questions
• 3. Who consumers these goods and services?
• gt Who attends a rap concert and who stays
  home?
• Eric Clapton

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Economic Systems

• Three KEY Economic Questions
• 3. Who consumers these goods and services?
• gt Who gets access to a good education and who
  has to start working after high school?

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Economic Systems

• Three KEY Economic Questions
• 3. Who consumers these goods and services?
• gt The answer to the questions of distribution
  is determined by how societies choose to
  distribute income.
• gt Factor payments the income people receive
  for supplying factors of production Land,
  Labor, Capital, or Entrepreneurship.
• gt How much should we pay the owners of the
  factors of production? How do we decide how
  much a particular piece of land is worth? How
  much do people in professions make?

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Economic Systems

• Three KEY Economic Questions
• 3. Who consumers these goods and services?
• gt Who gets to consume which goods and services
  lies at the very heart of the differences
  between economic systems today?

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Economic Systems

• Economic Goals and Societal Values
• Different societies answer the three economic
  questions based on the importance they attach to
  various economic goals.
• Command
  Economy Cuba
• Traditional
  The Free Enterprise
• Economy Anything else is just a
  bus ride
• Inuits

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Economic Systems

• Economic Goals and Societal Values
• 1. Economic Efficiency
• Most societies try to maximize their resources
  they have to work with. Making the most of the
  resources.
• Lumber Coal
  Labor

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Economic Systems

• Economic Goals and Societal Values
• 2. Economic Freedom
• Freedom from government intervention in the
  production and distribution of goods and
  services.
• We value the opportunity to make our own choices
  in things like the job we want, the
  products/services we buy, and etc.

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Economic Systems

• Economic Goals and Societal Values
• 3. Economic Security and Predictability
• We want an assurance that the goods and services
  will be available, payments will be made on time,
  and a safety net will protect individuals in
  times of economic disaster.
• i.e. Unemployment Insurance Disability
  Insurance Social Security and others

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Economic Systems

• Economic Goals and Societal Values
• 4. Economic Equity
• Society must decide the best way to divide its
  economic pie.
• What constitutes a fair share?
• Should everyone get the same, or should ones
  consumption depend on how much one produces?
• How much should society provide for those who are
  unable or unwilling to produce?
• Doctors earn more than garbage collectors
• Professional athletes earn more than secretaries

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Economic Systems

• Economic Goals and Societal Values
• 5. Economic Growth and Innovation
• A nations economy must grow for a nation to
  improve its standard of living.
• Standard of Living is the level of economic
  prosperity.
• If a country is growing, the economy has to grow
  in order to provide new jobs and income for
  people.

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Economic Systems

• Economic Goals and Societal Values
• 6. Additional Goals
• A society may value goals in addition to those we
  have talked about in the previous slides.
• Environmental protection, full employment,
  universal medical care, and other goals that may
  come to be in the future.

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Economic Systems

• Economies and Values
• Four different economic systems have developed to
  address the three key economic questions.
• Each system reflects a different prioritization
  of economic goals
• It also reflects the values of the societies in
  which these systems are present.

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Economic Systems

• Traditional Economies
• They rely on habit, custom, and rituals to decide
  what to produce, how to produce it, and to whom
  to distribute it.
• There is little room for (no) innovation or
  change.
• The traditional economic system revolves around
  the family.
• Work tends to be divided along gender lines.
• Kids take up the occupation of their parents.
• i.e If your family fish for a living, you will
  fish when you grow up.

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Economic Systems

• Traditional Economies
• These communities tend to stay relatively small
  and close.
• They work to support the entire group instead of
  themselves.
• Agricultural and hunting are the basics.

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Economic Systems

• Market Economies
• Economic decisions are made by individuals and
  are based on exchange or trade.
• The choices made by individuals determine what
  gets made and how, as well as who consumes the
  goods and services.
• These economies are also called free markets

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Economic Systems

• Command Economies
• In a centrally planned economy the central
  government alone decides how to answer the three
  questions.
• This is called Command Economies.

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Economic Systems

• 4. Mixed Economies
• Most modern economies are mixed.
• They are a market-based economic system in which
  the government plays a limited role.

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Economic Systems

• REVIEW
• 1. What is an economic system?
• 2. How do a traditional economy, a market
  economy, a command economy, and a mixed economy
  differ?
• 3. Why arent all people paid the same amount in
  factor payments for the resources they provide?
• 4. Why do governments provide safety nets for
  their citizens?
• 5. Give at least example of a traditional, a
  command, and a market economic system.