Post on 19-Apr-2018
Comparing Economic
SystemsOur Goal:
To understand the differences between different types of economic systems.
To understand the different incentives for each type of economic system.
Think back to yesterday…
What does the word “economy” mean? A system for producing and exchanging
goods and services among a group of people
What is an “economic system”? A way people use resources to make and
exchange goods
What economic systems did we learn about? Traditional (barter) economy
Command economy
Market economy
Mixed economy
An important vocabulary
word…
INCENTIVE
What is an incentive?
An incentive is a motivator—something that makes a person want to behave in a certain way
Some examples: Frequent Flyer Miles in this class—if you have no missing assignments, you get a 5 bonus point pass. What’s the incentive? The 5 bonus point pass!
Traditional Economy
(a.k.a., Barter Economy)
“That’s How We’ve Always Done It-Ville”
Only produce what you need to get by and to trade—not concerned with profit
People trade goods and services
Rarely use money
You give what you want and you get what you want
Example: I farm potatoes. Mr. Jones farms corn. I want some corn and he wants some potatoes, so we barter, meaning we go back and forth until we decide how much we are each willing to give up in exchange for what we want.
The incentive: only producing
what you need for yourself and
to trade for other things you
need, then getting what you
need while giving up as little as
possible of what you have to
offer.
Helpful Hints
The name: Barter pretty much speaks for itself. To remember traditional, think: they bartered in the olden days and they were also very traditional back then.
Why didn’t they use money? It wasn’t necessary. Since people mostly made the things they needed, they simply had to exchange items. Nowadays, often work in jobs where they aren’t necessarily producing an object. Instead, they get paid money, so they can buy what they want. (Example: a teacher, a doctor, a lawyer)
Command Economy
(a.k.a., planned economy)
“We Do What We’re Told-Ville”
The government decides what
goods and services will be
produced and who will produce
them.
The government owns the
businesses and resources.
People work for the government
and the government tells them
what to make and how.
In return, the government divides
up wealth equally among the
people—there are no super-rich
or super-poor people—everyone
is pretty much the same.
Also, the government often
provides basic needs like health
care to its people.
Example: North Korea—The
government of North Korea owns
the industries that produce all of
their goods.
The incentive: produce
exactly what you are told and
you will be taken care of.
Helpful Hints
The name: To remember command, think: the government is COMMANDING people to make certain things and do certain jobs. To remember planned, think: The government PLANS everything out—what goods will be made, who will make what, how much they will make, and how they will use the resources.
What might be one of the major DISADVANTAGES of a command/planned economy? Since everyone is paid the same, people may
not be very motivated to be creative or innovative or to work harder.
Market Economy
“Make as Much as We Want-Ville”
It’s all about supply and demand!
Demand: People want certain goods
and services (they DEMAND them)
Supply: Certain resources are
available and people are able to do
certain jobs (these are SUPPLIED)
The goods and services that are
produced are determined by what is
demanded and what is supplied
Market Economy, continued
How is this different than a command economy? In a command economy, the government determines
what will be produced and who will do it
In a market economy, it’s all about what people want, things like: What kinds of products do people want?
What kinds of services do people need?
What jobs are people able to do?
What resources are available?
Together, these things determine what will be made and who will make it.
Driven by the desire to produce more and make more
Incentive: The harder you work, the better the goods and services you can produce, and this means more… $$$$! (PROFIT)
Mixed Economy
Many economies are a combination of the command and market economies.
The US is actually a mixed economy!
Why? People can own their own businesses (market) BUT the government
makes rules for businesses (command)
People earn a salary or wage depending on their level of skill and experience (market) BUT the government has established a minimum wage (command)
Companies can decide what they want to produce and how much they should make (market) BUT the government can tell manufacturers if something is needed during a time of war (command)
People can go to college and pick their own major (market) BUT the government runs pre-college education (command)
Other command examples in the US: government controls waste removal and the mail system
Incentive: people are able to work hard and be successful as a result, but the government is good at providing some things that would be hard for individuals to do