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Lecture No: 07
Course Facilitator: Khurshid Alam Swati
University of Swat, Swat Email your query to:
Economics & Economic Systems
Economics The science of production and distribution of wealth
The branch of knowledge concerned with the production, consumption, and transfer of wealth
Economics is the study of how people choose to use resources
Resources include the time and talent people have available, the land, buildings, equipment, and other tools on hand, and the knowledge of how to combine them to create useful products and services
It deals with scarce resources to get maximum satisfaction
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Factors of production
Basic Resources are:
Primary factors of production
Land – Raw Materials
Labor – Workforce
Secondary factors of production
Capital – Equipment and machinery
Entrepreneurship – Skills and abilities
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Economics types
1. Theoretical economics
Macro economics
Micro economics
2. Applied economics
Involve Math
© Khurshid Alam Swati 2-4
How Does An Economy Work? Three issues/questions of economics
Nations must answer 3 basic Economic question:
a) What goods and services should be produced?
b) How should the goods and services be produced?
c) For who should the goods and services be produced?
The way a nation answers these questions defines their economy.
© Khurshid Alam Swati 2-5
Economic System
The way of addressing these questions is called economic system
These three issues defines structure of economy
I. Traditional economy – depend on beliefs
II. Market economy – capitalist economy
III. Planned economy (Command) – socialist economy
IV. Mixed economy
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Economic System (Cont’d)
The system of producing and distributing of goods and services and allocating resources in a society
It includes the combination of the various institutions, agencies and consumers that comprise the economic structure of a given community
It includes how these various agencies and institutions are linked to one another, how information flows between them, and the social relations within the system
No economy can be purely market or purely command
Elements of both economies are found in all systems this makes all economies mixed
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1. Traditional Economy
An economic system in which economic decisions are based on customs and beliefs
People will make what they always made & will do the same work their parents did
Exchange of goods is done through Bartering: Trading without using money
Examples:
Villages in Africa and South America
The Inuit tribes in Canada
The caste system in parts of rural India
The Aborigines in Australia
© Khurshid Alam Swati 2-8
Traditional Economy (Cont’d)
Who decides what to produce? People follow their customs and make what
their ancestors made
Who decides how to produce goods & services? People grow & make things the same way
that their ancestors did
Who are the goods & services produced for? People in the village who need them
© Khurshid Alam Swati 2-9
2. Market Economy - Capitalist
No government involvement in economic decisions
The government lets the people answer the three basic economic questions
What? Customers decide through their purchases
How? This is left up to the individual business
Who? People who have money can buy more – this encourages hard work and investments
© Khurshid Alam Swati 2-10
Capitalism (Cont’d)
An economic system characterized by private ownership of businesses and marketplace competition
The government is concerned about its people and takes care of those who cannot care for themselves
The political system is a democracy with leaders elected by the people
The United States and Japan are examples of a Capitalist Economy
© Khurshid Alam Swati 2-11
Advantages of Market Economy
Adjusts to change based on consumer wants
High degree of individual freedom
Low levels of government interference
Because individuals (with money) make the decisions, everyone (with money) has a voice in the way the economy runs
Wide variety of available goods & services
Many choices = high degree of consumer satisfaction
© Khurshid Alam Swati 12
Disadvantages of Market Economies
Poverty: only those with money can participate
Market does not provide for people’s basic needs. Governments must attempt to do this
High degree of uncertainty people lose jobs, businesses fail
Greed based system puts profit before people
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3. Command Economy - Socialist The Government controls the factors of production and makes all the decisions The government is responsible for answering the
three economic questions
What? One person ( a dictator) or a group of government officials (central planning committee) decide what is to be produced
How? The government owns all the factors of production and makes all the decisions about production
Who? The government decide who receives what is produced in the economy
Socialism (Cont’d)
Increased government involvement in people’s lives and the economy
The main goal is to keep prices low for all people and to provide employment for many
The government runs key industries and makes economic decisions
More social services for all and free or low cost medical care
Canada, Germany, Sweden, Australia and Great Britain are all examples of socialist economies
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How do Command economies answer the basic economic questions?
1) What to produce? Whatever the government says to produce
2) How to produce? However the government tells you to produce
3) For whom to produce? For whomever the government tells you to produce (ideally the entire society)
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Advantages of Command Economy
Because the government has total control over production and its factors, these economies can change rapidly.
Whatever is needed most will be produced.
There is no uncertainty (people are told when and how to work)
Free education, health care, and other public services
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Disadvantages of Command economy
Economy designed to meet needs not wants
No incentive to work hard (people don’t often lose their jobs, so they do the bare minimum to get by)
Large bureaucracy means slow decision making, raises cost of production, lacks flexibility
No reward for initiative which slows progress
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Communism
The government runs everything (Totalitarian government)
Only one political party, the Communist party, runs the government
All people able to work are assigned jobs – there is virtually no unemployment
The government assigns housing, schools, and occupations
There is little to no economic freedom
Cuba, North Korea, and China are examples
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4. Mixed Economy
A hybrid that blends some aspects of both market and planned economies
Some government involvement through mandatory laws and regulations that businesses follow
Labor Laws, Minimum Wage
The government provides social programs for those who need help
Medicare, welfare
All economies are mixed they are classified based on how much the government is involved in the process
© Khurshid Alam Swati 2-20