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Economic Systems

Engineering EconomicsLecture 2227 January 2010

Economic Systems

Production Possibilities Frontier (PPF)

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Why are economies around the world growing Why are economies around the world growing

more market oriented?more market oriented?

How much can an economy produce with the How much can an economy produce with the

resources available?resources available?

Can you actually save time by applying Can you actually save time by applying

economic principles to your family chores?economic principles to your family chores?

Why is ‘experience’ a good teacher?Why is ‘experience’ a good teacher?

Why is ‘fast food’ so fast?Why is ‘fast food’ so fast?

ConsiderConsider

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INFINITE WANTS + FINITE RESOURCES = THE NEED TO ECONOMISE

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Best case scenario:Best case scenario:

Maximize our satisfaction with our limited resources,Maximize our satisfaction with our limited resources,

i.e. choose how to use our resources to our greatest i.e. choose how to use our resources to our greatest advantageadvantage

ECONOMISEECONOMISE

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1. LAND – all natural resources

2. LABOUR – human effort involved in production

3. CAPITAL – money, machinery, equipment for manufacturing

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Three Economic Questions

All economies must answer these three questions:

1.1. What goods and services will be produced?

2.2. How will they be produced?

3.3. For whom will they be produced?

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‘Real Economy’ versus ‘Money Economy’

Q: Would the wealth & standard of living of the country

increase if the Government printed more money?

The real economy is concerned with the amount of Goods &

Services available to the population - e.g., shopping centres,

public transport, quantity of food, number of hospital beds

etc..

Whereas, money has no intrinsic value – it merely enables

transactions to take place – it can be exchanged for G&S’s

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Money

• Money is a liquid asset (can easily be converted into other assets)

• The functions of money:

medium of exchange

unit of account

a store of wealth

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Economic System All economies face the ‘economic problem’All economies face the ‘economic problem’ Society must adopt an economic systemSociety must adopt an economic system in in

order to allocate their resourcesorder to allocate their resources When allocating resources, the society must When allocating resources, the society must

consider 3 questions:consider 3 questions: What is to be produced?What is to be produced? How are the goods to be produced?How are the goods to be produced? For whom?For whom?

Society’s answers to these questions will Society’s answers to these questions will determine which economic system they determine which economic system they adopt: Capitalist, Mixed , Socialist or Islamicadopt: Capitalist, Mixed , Socialist or Islamic

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Economic System An economic system is the set of

mechanisms and institutions that resolves the what, how, and for whom questions.

Some standards used to distinguish among economic systems are:

Who owns the resources?

Allocation of resources?

Incentives and rewards?

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Market Economy - Capitalism

All resources are privately owned

Economic activity is based on the prices

generated in competitive markets

Any income derived from selling resources

goes exclusively to each resource owner

Also called capitalism

USA Model

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Capitalist Economic System

Free enterprise system

Price mechanism - Competition

Privately owned resources

Profit motive

Sovereignty of Dollar

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Advantages of Capitalist System

Encourages most efficient methods of production by private businesses (profit motive)

Encourages competition in production techniques

Allows economic freedom

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Problems with Market EconomiesProblems with Market Economies

Difficulty enforcing property rights

Some people have few resources to sell

No public service motive except for some

essential

Inequality in distribution of goods & services

Monopoly lead to unfair practices

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Centrally Planned Economy - SocialismCentrally Planned Economy - Socialism

All resources government owned

Economy by the central plans of government

Sometimes called Socialist Economy

Use visible central planners

UK Model

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Problems with Centrally Planned EconomiesProblems with Centrally Planned Economies

Consumers get low priority

Little freedom of choice

Central planning can be inefficient

Resources owned by the state are

sometimes wasted

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Mixed Economy

Market economy + Social Economy

Government regulates the private

sector in a variety of ways.

China & Pak Model

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Features of Mixed Economies Monetary system & legal system Controlling monopolies Provision of essential goods & services Regulating undesirable business practices Alleviate inequality in society (progressive

tax, social welfare) Attempting to provide stable economy

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Islamic Economy

Sovereignty of Allah

Circulation and not accumulation

Money is for help to get better reward in

the world hereafter – social welfare

Discourages lust, greed and materialism

Discourage wrong means

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Production Possibilities Frontier (PPF)

PPF model PPF model Shows possible combinations of Shows possible combinations of

types of goods that can be produced types of goods that can be produced when available resources are used when available resources are used fully and efficientlyfully and efficiently

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Production Possibilities Frontier

A through F are attainable

I represents inefficient use of resources

U represents unattainable combinations

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Reasons of Shifts in the PPF

Economic Growth – an expansion in the

economies ability to produce

Changes in resource availability

Increases in stock of capital goods

Technological change

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Shifts in the PPF

Increase in available resources Decrease in available resources

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Thanks we have finished the

course