1B - Economic Systems

Economic Freedom

• Market Economy

• Businesses can make decisions without the government intervening

• More business opportunity

• Freedom for businesses to spend and invest money however they want

Economic Efficiency

• Market and Command economy

  • Command economies can be efficient, but often aren’t

• Makes most of a society’s resources

• Uses all of the resources to the fullest for less waste

• Views labor as scarce resources

• Least input for most output

• Often very efficient

Economic Equity

• Command economy

• Fair and just distribution of wealth

• Everyone should have an equal share

• All jobs are equally as important

Economic Growth

• Market and Command economy

  • Command is directed by planners

• Growth means access to more resources

Economic Security

• Command economy

• People can lean on the government some

• A safety net for the less fortunate

• Support and healthcare for all

• Market economies don’t want the people to freeload off of the government, so they don’t have this

Economic Stability

• Command and traditional economy

• Makes sure that prices, employment, inflation, innovation, and resources stay stable

• Makes sure booms and busts aren’t extreme

  • Command economy - uses government regulations to accomplish this

  • Market economy - uses invisible hand and economic freedom to accomplish this

American Free Market Capitalism

• Adam Smith wrote about economics

  • Capitalism and markets are the reasons for standard of reason

  • Laissez-Faire: Government interferes little, government prolongs problems

  • Invisible Hand: Market is chaotic, but supply and demand guides it

The 5 Pillars of Free Market Capitalism

• Private Property: People can own and control their possessions as long as they want if they don’t take away others’ rights

• Private Enterprise (Economic freedom): Freedom to make economic choices - jobs, workers, production, etc.

• Voluntary Exchange: The option for buyers and sellers to trade or to not trade

• Profit Motive: Wanting to improve one’s material well-being, want profit

• Competition: The struggle for sellers to attract customers with the best products at the lowest price

Private Goods vs Public Goods

Private Goods

• Made and sold by private companies to satisfy customers

• Benefits and access vary by who can buy

• Not all have equal access

Public Goods

• Provided by the government for free or at a discount

• Not provided for profit

• All users benefit

• Freeloader problem, not all people pay the same amount - some not at all

Mixed Market vs Mixed Socialist

Mixed Market

• Government dictates less

• Free market has more power

• Strong profit motive

• Public and private

• Government contracts bid public projects to private property

• Welfare benefits poor

Mixed Socialist

• Little private property

• Government dictates who/what/how

• Most large industries and land are owned by the government

• Move towards capitalism

• Usually one party states

Traditional Economies

• An economic system where the usage of scarce resources and other activity is made from norms, habits, and customs

Benefits

• Everyone has a specific role

• There is little uncertainty of what/how/whom to produce

Disadvantages

• Discourages new ideas and ways of doing things

• People are punished for doing things differently

• Lack of inventions creates economic stagnation and a lower standard of living

What/How/Whom Answers

• You take the role of your family

• You produce the same way your parents did

• Who to produce depends on the tribe

Command Economies

• An economic authority that makes all of the decisions for the society

Benefits

• Can quickly change direction

• Allows citizens some resources they wouldn’t be able to afford or normally have otherwise

Disadvantages

• Leaders take from the population to provide for themselves

• Loss of individual freedom

• Produces low-quality goods

• A large bureaucracy (maybe too much)

• Rewards for individuals’ actions are rare

• Loss of flexibility to deal with different sized problems

What/How/Whom

• The bureaucracy and leaders manage the what, how, and whom

Market Economies

• An economic system where the supply and demand help determine the products, how they are made, and their prices

Benefits

• All have individual freedom

• Changes direction slowly

• Little government interference

• Decentralized decision making

• Big variety of goods and services

• High satisfaction

Disadvantages

• Rewards only the hardest workers

• Doesn’t produce enough public goods for defense, healthcare, or education

• Workers and businesses have big risks because of a changing economy

What/How/Whom

• Sellers produce what the people want

• Businesses choose how to produce

• The income the people make decide who is willing and able to buy

The Role of Entrepreneur

• Organizes and manages the factors of production for profit

• Starts new businesses that may benefit all of society

• Makes new products, + competition, + production, higher quality, lower prices

The Role of Consumer

• Determines production

• the ruler of the market

• If they want something, it will be very successful, if they don’t it will go out of business

The Role of Government

• Provides: Protection against misinformation on labels and illegal products

• Produces: Programs, education, highways, police, justice, subsidies to part of the economy

• Regulates: Protects competition, oversees interstate commerce

• Consumes: Scarce resources

The Global Transition to Capitalism

Why the Transition

• The best way to make a lot of wealth

• Increases economic growth

• Increases standard of living

• Increases productivity

Drawbacks

• People must learn to make their own decisions, fend for themselves in markets, take initiative, and interpret prices

• Massive unemployment

• Instability

• Social unrest

Nationalization

• The conversion of an economy with private ownership to an economy owned by the government

• Private to public