Download Economic Systems

Economics
3 Primary Economic Systems
Different Economic Systems Explored
Economic Systems
• All economic systems allocate scarce resources
• Every society must choose both an economic &
political system
3 Basic Questions
Every Economic System must answer 3 questions:
1) What to Produce?
2) Whom to Produce it for?
3) How to Produce it?
3 Types of Economic Systems
• MARKET
• COMMAND
• TRADITIONAL
Adam Smith
(1723-90)
• Founder of Free Market Economics
– He wrote “The Wealth of Nations” in 1776
• Argued: Free markets best promote the social welfare
• Government should not interfere in markets!
– The economy is self-regulating through an invisible hand
"It is not from the benevolence of the butcher, the brewer, or
the baker, that we expect our dinner, but from their regard
to their own interest.”
“We address ourselves, not to their humanity but of
their advantages."
Adam Smith
Self-interest is our incentive to work hard
Reading:
“Self-Regulating” Free Market
Please buy my Vulture
Scarce
Resources
Adam Smith’s 2 laws of the Market
• 1) Self-Interest:
• People act in their own self-interest
• Profits or greed motivate individuals (incentive)
• 2) Competition:
• Lots of producers keep business “honest”
• Since business “fears” competition goods are
produced at the lowest possible price
Adam Smith 2 Laws in action:
People follow their own self-interest
Threat of competition keeps people honest
Markets naturally self-regulate
Invisible Hand
Government
should not
Interfere!
Command Economy
Karl Marx
1848
• Soviet Union “adopted” command economic system
– Called communism
• Government controlled economy (centrally planned)
– stressed equality & work for the common good (collective system)
• Economic Incentive to work hard?
For the collective good!
Self-Regulation vs. Central Planning
• Market Economy
• Command Economy
Shortage of
A Good?
Cuba’s Future?
•
https://www.youtube.com/watch?v=r3ZnaLuqMCo
Traditional Economic System
• Designed to preserve culture of society
• Change occurs very slowly
• Gov’t uses strict laws to enforce behavior
CHINA
Bhutan Video:
Traditional Economy
Benefits
Costs
https://www.youtube.com/watch?v=CXJwNSkdTH0
https://www.youtube.c
3 min
https://www.youtube.com/watch?v=2jf9xrnUjpI
11 min.
Bhutan June 2011
Typical Village
No traffic lights in Bhutan
2011 Music Video
production in Bhutan
Which Economic System?
Society will choose an economic system based on goals:
Economic
&
Social
• Growth
•Justice
• Employment
•Equality
• Efficiency
•Environment
• Stability
•Freedom
GEES-Growth, Efficiency, Employment, Stability
Production
HOW
Economic System
MARKET
COMMAND
WHAT
FOR WHOM
Growth &
Efficiency
Supply &
Demand
Gov’t or
Central
Planner
Gov’t or
Central
Planner
Equality
Need
Necessity
Need &
Tradition
TRADITIONAL Stability
Price
GEES-Growth, Efficiency, Employment, Stability
Summary
• Market systems stress competition
– Work “individually” in your own “self interest”
– Invisible hand regulates economy
• Command systems stress equality
– Work “collectively” for the common good
– Government centrally plans economy
• Traditional systems stress preservation of culture
– Government maintains culture of society
Economic Systems Worksheet