Economic Systems

Review

Because all societies face scarcity, decisions concerning WHAT, HOW, AND FOR WHOM to produce must be made.

All societies have an economic system; an organized way of providing for the wants and needs of their people.

The way in which scarce resources are used determines the type of economic system they have.

Command EconomyCuba, North Korea

Command Economy

Economic decisions are made by the GOVERNMENT; the people have little to no influence over how the basic economic questions are answered.

Command Economy

In this style of economy, the government makes all the major economic decisions.

There are few centrally planned economies in the world today, but they can still be found in Cuba and North Korea.

Command Economy: Advantages

1. Strong central coordination of the means of production.

2. It can quickly change direction in a short period of time as the government controls all means of production.

3. There is little uncertainty.4. They tend to provide basic levels of

education, health and other services at little to no cost to its people.

Command Economy: Disadvantages

1. It is not designed to meet the wants of the consumer; goods people don’t want may be produced.

2. It does not give people the motivation to work hard.

3. It requires a large decision making bureaucracy.

4. Consumers have little choice for products.5. People with new ideas (entrepreneurs) find it

difficult to get ahead in a centrally planned economy.

Command Economy: Values

• guaranteed employment• collective good and equality• public ownership of resources• cooperation• stability in all areas• production is equally shared• All people have same opportunities and

benefits• high quality of life is not achieved unless

people have economic security

The Market EconomyA look at the United States

Market Economy

In a model market economy people and businesses act in their own interests to answer WHAT, HOW, and FOR WHOM questions.

A market is an arrangement either a physical place or a tool, that allows buyers and sellers come together to exchange goods and services.

In a market economy, people’s decisions to buy, or not, act as “votes”.

Because producers are always looking for goods and services that consumers will buy, the consumer plays a key role in determining WHAT to produce.

Market Economy

Economic Freedom

Citizens place a high degree of value on the freedom to make their own economic decisions.

– People like to choose their own occupations, employers and uses for their money.

– Business owners like the freedom to choose where and how they produce.

The belief in economic freedom, like political freedom is one of the cornerstones of the American Economy.

Market Economy

Economic Efficiency

Most citizens recognize that resources are scarce and that factors of production must be used wisely.

– If resources are wasted, fewer goods and services can be produced and fewer wants and needs can be satisfied.

– Economic decision making must be efficient so that the benefits out weigh the costs.

Market Economy

CompetitionCitizens believe in the power of

competition.

– Entrepreneurs own their factors of production have the freedom to create products that they think will be most profitable.

– Competition allows for buyers to find the best products at the lowest prices.

Competition is THE MOST IMPORTANT feature of a market economy.

Reasons government intervenes in a market economy

• Although limited, governments sometimes intervenes:

• to protect consumers with laws to help ensure competition or prevent price fixing.

• to ensure ethical practices such as labour laws or environmental laws.

1. Over time, it can adjust to change.2. There is a high degree of individual freedom.3. There is little to no government interference

(only for economic security and to stop monopolies).

4. Consumers determine what to produce; goods are produced only if there is a market for it.

5. Technology changes at a great speed.6. It is highly competitive and therefore there is

an incredible variety of better goods and services. Almost any product can and will be produced if a buyer exists.

Market Economy: Advantages

Market Economy: Disadvantages

1. It does not provide for the basic needs of everyone in the society.

2. It does not provide enough services that people value highly.

3. This system has the least support for social safety nets for unemployed workers or failed businesses.

4. Monopolies exist.5. Products which are potentially harmful may

be produced.6. Products may be produced which have little

to do with people’s needs.

Market Economy: Values

• individualism• private ownership• material wealth• choice and freedom• lassiez faire (leave alone policy) and the

“invisible hand”• consumers determine what is produced• most important feature: COMPETITION

Reasons government intervenes in a market economy

• Although limited, governments sometimes intervenes:

• to protect consumers with laws to help ensure competition or prevent price fixing.

• to ensure ethical practices such as labour laws or environmental laws.

Mixed EconomyHow do we describe our economy?

Mixed Economy

A mixed economy combines

government decisions and laws with producers and consumers. It balances public and private ownership, as well as individual freedom and common good. In theory, it takes the best aspects of the command economy and the market economy.

Canada as a mixed economy

• Private ownership and competition is important, but the government is more heavily involved.

• Most of the economy is privately owned, but the government owns some industries thought to be essential.

• The government has more regulations on business than a market economy.

Mixed Economy: Advantages

1. Decisions are made by government, business and consumers.

2. Answers how to produce through decisions in both public and private enterprises.

3. MAIN GOAL: The government provides for the welfare of the people; programs exist where all citizens are taken care of. EX. Welfare, old age pension.

4. The government is involved in laws, regulations and safeguards to protect consumers from being cheated or harmed.

5. Freedom and choice still exists.

Mixed Economy: Disadvantages

1. Critics disagree over how much the government should interfere.

2. If we have social safety nets in place, why do we still have homeless people?

In Summary…

• A market economy is an economic system where the government does not intervene but allows individuals to make all economic decisions.

• It is based on the values of capitalism. The market economy of the United States is based on this economic system.

• However, the amount of government control and spending will depend on the political ideals of the government in power.

In Summary…

• A mixed economy is an economic system that falls in between capitalism and socialism or a market economy and a command economy on the economic continuum.

• This economic system includes both government control and individual freedom in making economic decisions.

• Once again, the amount of government control and spending will depend on the government in power.

Assignment:

What do WE value in our society?

1. Complete the assignment: Case Study of Canadian and U.S. Economic Histories.