Fundamentals Part 3

Economic SystemsSSEF4

Three Basic Economic Questions

What to produce?

How to Produce?

For Whom to produce?

Let’s take a closer loos at each of these questions.

What to produce….

• What should the individual, company, or country produce?

• How much of each thing should it produce?

How should we produce it?

• Should we do it the way we always have?• Should we invest in new tools and materials?• Should lots of people make the same thing or

should just one person make it?

For whom should we produce?

• Should we supply to only ourselves?• Should we supply to others?• Should we focus on making only expensive

stuff?• Should we focus on making things for

everyday use?

How do we answer those questions as a society?

• Well it depends on the type of society you are in as to who has the power to answer each of those questions and how they are answered.

Types of Economies• Command• Market• Mixed

Command Economy

• Government makes all basic decisions• Early Examples: Ancient Egypt, China, and India• Modern Examples: Communist China, Socialist

Russia• How do they work: government groups tried to

predict what was needed and then focused all production on those things. Controlling the resources, deciding what would be produced, how it would be produced, and how it would be allocated.

Command Economy

Disadvantages:• Too difficult for one central group to decide how

much of basic everyday things would be needed and allocating resources for roads, public works, etc.

• Can not respond quickly changing needs and conditions.

• Provide no incentives for workers or producers• No room for new ideas which stifles an economy.

Market Economy

• Based on private ownership• Private individuals and companies control

resources.• Distribution is determined by price which

reflect laws of supply (how much is produced) and demand (how much is wanted).

Market Economy

Quick introduction to Supply and Demand:• When a product is in low supply and the

demand for it is high….means those who can afford to pay the high price will get it.

• However, is the price is too high demand will be low and producers may need to lower their price to increase demand.

But that’s enough for now we will really get into this in the next unit!!!

Market Economy• Based on Competition • Very efficient• Producers compete with each other driving down

prices• Consumers compete to buy scarce products driving up

prices• Producers prices and what consumers will pay meet

the price stabilizes • Responds quickly to changing wants and needs• FREEDOM for consumers and producers to make

choice to improve their own standard of living.

Market Economy• Also known as Capitalist: freedom to make

profit and have private ownership• Also known as Laissez-faire meaning to leave

alone (although this is rarely the reality)In a true market economy the government does

not interfere and the allocation of goods and services is based on prices and profits…. BUT that would also give people the freedom to

starve.

Market EconomyDisadvantages:• Always result in an unequal distribution of wealth• Can not guarantee equity or fairness• Extreme class differences• Producers have no incentive to provide lower cost

options for poor• Greed can encourage sacrifice for safety in order to

lower costsMost economies today are based on a mixture of

market forces and government control.

Mixed Economy• Most economies today are a mixed system allowing for

market forces and government intervention to work together.

• People have the right to Consumer Sovereignty which means they can buy what they want when they want as long as they have the funds (or credit) Consumers in the American economy express their wants in the form of purchases in the marketplace. The dollars they spend are the “votes” used to select the most popular products.

• Companies still work based on Profit Motive meaning they are in the business to make money

Mixed Economy

Types of Government Intervention:• Enforce property rights, contracts, patents,

and copyrights• Provide stable supply of money• As a protector, a government may pass and

enforce laws meant to prevent the abuse of consumers and workers.

Mixed Economy

It works different in different places:• Sweden, France, &Germany:

• Provides safety nets to protect workers, consumers, and families from the market system

• United States, Canada, and England:• most economic decisions are based on markets with

limited government controls.

• United States:• Public Schools, Highways, Parks, Low-income housing