Economic SystemsEconomic Systems

The Rules and Incentives in The Rules and Incentives in an Economyan Economy

Traditional EconomyTraditional Economy

Families, clans, or tribes take care of Families, clans, or tribes take care of production and distribution by production and distribution by following the customs that have been following the customs that have been handed down from one generation to handed down from one generation to the nextthe next

Command EconomyCommand Economy

Also known as Communism, Socialism, Also known as Communism, Socialism, Marxism, and Centrally Planned.Marxism, and Centrally Planned.

Government officials decide what goods Government officials decide what goods and services will be produced, how they and services will be produced, how they will be produced, and how they will be will be produced, and how they will be distributeddistributed

The government owns and controls all The government owns and controls all means of production. (N. Korea, Cuba)means of production. (N. Korea, Cuba)

Market EconomyMarket Economy

Also known as CapitalismAlso known as Capitalism Based on individual choice and Based on individual choice and

voluntary exchange. Consumers are voluntary exchange. Consumers are free to spend their money as they free to spend their money as they would like.would like.

These consumers are also producers These consumers are also producers and are free to enter into a business and are free to enter into a business or sell their labor to whomever they or sell their labor to whomever they would like.would like.

Mixed EconomiesMixed Economies

Most economic systems are actually Most economic systems are actually a combination of a centrally planned a combination of a centrally planned economy and a market economy, economy and a market economy, some to a lesser degree (the U.S.) some to a lesser degree (the U.S.) and some more so (Venezuela) and and some more so (Venezuela) and many along the spectrum in many along the spectrum in between. between.

Economic SystemsEconomic Systems

What is the What is the economic economic problem?problem?

Economic SystemsEconomic Systems

Scarcity!Scarcity!

Soviet companies were not guided by prices or profit. Gov’t Soviet companies were not guided by prices or profit. Gov’t officials determined output quotas based on quantitative officials determined output quotas based on quantitative

measurements. measurements. Businesses were paid based on meeting these quotas.Businesses were paid based on meeting these quotas.

1.1. Why did a business make desk lamps that were filled with lead Why did a business make desk lamps that were filled with lead that were almost too heavy to carry?that were almost too heavy to carry?

2.2. Why did light bulb producers only make tiny night light size Why did light bulb producers only make tiny night light size bulbs?bulbs?

3.3. Why did oil companies drill many shallow holes when they Why did oil companies drill many shallow holes when they knew that oil deposits are usually found in deep holes that knew that oil deposits are usually found in deep holes that require slower drilling? require slower drilling?

4.4. Why did a construction superintendent order his workers to Why did a construction superintendent order his workers to remove bathtubs from the first floor and install them in the remove bathtubs from the first floor and install them in the third floor while he slowly lead inspectors through apartment third floor while he slowly lead inspectors through apartment building. building.

5.5. Why did black market vendors sell burned out light bulbs?Why did black market vendors sell burned out light bulbs?

Advantages and Advantages and DisadvantagesDisadvantages

What is GOOD about Communism?What is GOOD about Communism?1.1. Low unemployment-everyone has Low unemployment-everyone has

a joba job2.2. Great Job Security-the government Great Job Security-the government

doesn’t go out of businessdoesn’t go out of business3.3. Equal incomes means no Equal incomes means no

extremely poor peopleextremely poor people4.4. Free Health CareFree Health Care

What is BAD about Communism?What is BAD about Communism?1.1. No incentive to work harderNo incentive to work harder2.2. No incentive to innovate or come No incentive to innovate or come

up with good ideasup with good ideas3.3. No Competition keeps quality of No Competition keeps quality of

goods poor.goods poor.4.4. Corrupt leadersCorrupt leaders5.5. Few individual freedomsFew individual freedoms

Economic SystemsEconomic Systems

Look at the Economic Freedom of the Look at the Economic Freedom of the World map on the wall. World map on the wall.

What do the countries in red and What do the countries in red and orange have in common?orange have in common?

Economic SystemsEconomic Systems

Why are things less scarce in S. Why are things less scarce in S. Korea than N. Korea?Korea than N. Korea?

Economic SystemsEconomic Systems

How can we best solve the economic How can we best solve the economic problem?problem?

North and South KoreaNorth and South Korea

N & S Korea at NightN & S Korea at Night

The Three Economic QuestionsThe Three Economic Questions

People in all economies (traditional, People in all economies (traditional, capitalist, command and mixed) capitalist, command and mixed) must decide how to answer the must decide how to answer the three basic economic questions.three basic economic questions.

1.1. What will be produced?What will be produced?

2.2. How will it be produced?How will it be produced?

3.3. For whom will it be produced?For whom will it be produced?

Factors of ProductionFactors of Production

Factors of ProductionFactors of Production1.1. LandLand

2.2. LaborLabor

3.3. Capital (tools, machinery, etc.)Capital (tools, machinery, etc.)

4.4. Entrepreneurship Entrepreneurship

N & S Korea at NightN & S Korea at Night

Economic SystemsEconomic Systems

ReviewReview Know the three economic systems Know the three economic systems

mentioned in class and their mentioned in class and their respective characteristicsrespective characteristics

Know the broad social goals of Know the broad social goals of economic systems and which system economic systems and which system they most closely alignthey most closely align

What are the three key economic What are the three key economic questions?questions?

Economic SystemsEconomic Systems

Explain:Explain: The invisible hand (Smith)The invisible hand (Smith) Incentives and private propertyIncentives and private property Command economy and incentivesCommand economy and incentives List and explain the 4 factors of List and explain the 4 factors of

productionproduction