Module 2 - Economic systems (All Eco Syst Docs)

Economics

The study of how people make decisions given the resources that are provided to them

All about CHOICES, both individual and group choices

Four Types of Systems

The Traditional Economic System

The Command Economic System

The Market Economic System

The Mixed Economic System

Traditional Economy

(Definition, Roles, Stability, Economic Activities, Bartering, Cultural Basis, Evolution, Vulnerability)

• Definition: In this economy, customs and habits from the past determine the production, distribution, and consumption of goods.

• Roles: Each member knows their societal role from an early age, with jobs passed down through generations.

• Stability: There is little change in job roles over generations, and individuals are relied upon to fulfill their responsibilities.

• Economic Activities: Common activities include farming, hunting, and herding.

• Bartering: Trade occurs through bartering, which is the exchange of goods without money (e.g., trading one good for another).

• Cultural Basis: Economic decisions are based on cultural values and beliefs, focusing on traditional practices.

• Evolution: Some of these economies have evolved into mixed economies, incorporating elements of capitalism, socialism, or communism.

• Vulnerability: These economies can be negatively impacted by other economic systems that exploit natural resources.

Command / Planned Economy

(Definition, Government Control, Ownership, Worker Responsibilities, Decision-Making Issues, Price Control, Typical Context)

• Definition: In a command economy, government planning groups make all basic economic decisions.

• Government Control: The government determines which goods and services are produced, along with prices and wage rates.

• Ownership: Farms and businesses are owned by the government, not by individuals.

• Worker Responsibilities: Workers are instructed on what and how much to produce, each given a quota to fulfill.

• Decision-Making Issues: A challenge is determining what needs to be produced.

• Price Control: A benefit is that prices are regulated, allowing people to know costs in advance.

• Typical Context: Command economies are usually found in communist governments.

Market Economy

(Definition, Alternative Names, Ownership, Production Decisions, Price Determination, Consumer Benefits, Price Stability Issues)

• Definition: In a market economy, decisions are influenced by price changes between buyers and sellers.

• Alternative Names: Market economies are also referred to as free enterprise, capitalism, and laissez-faire.

• Ownership: Businesses and farms are owned by individuals and corporations.

• Production Decisions: Each business or farm independently decides what to produce.

• Price Determination: Prices are determined by supply (the amount of goods available) and demand (the number of consumers wanting the goods).

• Consumer Benefits: A benefit is that consumers can find the goods they want and purchase as much as they can afford.

• Price Stability Issues: A problem is the lack of price stability; mismanaged businesses can fail, leading to job and income loss for workers.

Mixed Economy
(Definition, Commonality, Components, Globalization Impact)

• Definition: A mixed economy has characteristics of both pure command and market economies.

• Commonality: All modern economies exhibit traits of both systems, often referred to as mixed economies, though most lean closer to one type.

• Components: A mixed economy combines elements of market, command, and traditional economies.

• Advantages and Disadvantages: It encompasses both the benefits and drawbacks of other economic types.

• Globalization Impact: Most countries operate under a mixed economy due to globalization.

Advantages of a mixed economy

• Efficient distribution of goods and services.

• Prices reflect supply and demand.

• Rewards efficient producers, providing better value to consumers.

• Encourages innovation and directs capital to effective producers.

• Government Role: Addresses neglected sectors (e.g., defense) and supports less competitive individuals.

Disadvantages of a mixed economy

• Market Freedom Risks: Excessive freedom may leave vulnerable members without support.

• Central Planning Issues: Can lead to monopolies and increased national debt.

• Lobbying Risks: Successful businesses may seek undue government subsidies and protections.

• Bailouts: Large companies may receive government bailouts during financial troubles.

Pros of a Command / Planned economy

• Resource Management: Can manipulate large amounts of resources for significant projects without legal or environmental hurdles.

• Societal Transformation: Can transform society to align with the government's vision, including nationalizing companies and reallocating workers based on skill assessments.

Cons of a Command / Planned economy

• Neglect of Needs: Rapid changes may ignore societal needs, leading to the emergence of black markets and other coping strategies.

• Mismatch of Production and Demand: Goods production often does not align with demand, resulting in poor planning and rationing.

• Lack of Innovation: Innovation is discouraged; leaders are rewarded for compliance rather than risk-taking.

Businesses → Government

• Businesses buy goods and services from the government, typically through the purchase of goods by state-owned businesses. The businesses then pay the government an agreed price.

• Businesses also pay taxes to the government to fund the provision of services and infrastructure in the country.

Government → Businesses

• The government buys the goods and services produced by businesses and pays them the agreed price.

• The government also collects taxes from businesses, which it uses to make improvements to the country and provide businesses with services and other infrastructure.

• The government makes investments into businesses to help them flourish and provides guidance and legislation to support and help businesses be ethical and profitable.

Households → Government

• Households own factors of production (e.g. labor) and sell them to the government, for which the government pays wages.

• Households also pay taxes to the government for the services and infrastructure they receive.

Government → Households

• The government provides households with goods and services such as infrastructure, education, healthcare, etc.

• The government also supplies households with employment and capital in return for factors of production.

Households → Businesses

• Households sell the factors of production they own (e.g. labor) to businesses, who can then convert them into goods and services.

• Households buy goods and services from businesses to satisfy their wants and needs, allowing businesses to make a profit.

• Households supply businesses with labor, as the people in households are the workers in a business.

Businesses → Households

• Businesses sell goods and services to households.

• Businesses employ people from households and pay them salaries and wages.

Factors of Production

• Capital - money/property to start/maintain a business

• Entrepreneurship - human factor that organizes other factors

• Land - natural resources

• Labour - human input through mental/physical efforts

Local Economies

• Households

• Businesses

• Government/State

The Global Economy

• Adding a 4th participant to a local economy - "the rest of the world" or foreign sector - enables international trade

• All countries engage in international trade to some degree

• The increased integration of trade and economic activities across nations is called globalization

Globalization

• Refers to the increased integration of businesses and governments across the world

• This increased interaction and influence between different national economies is a defining feature of the global economy