Download economic systems

ECONOMIC SYSTEMS
• An organized approach to
producing and distributing
goods and services.
• Purpose is to make important
decisions about the use and
distribution of resources.
• All economic systems deal
with the same problem
SCARCITY
unlimited wants
vs.
Limited resources
Economic Systems answers the problem
of scarcity.
Limited Resources
> SCARCITY <
Unlimited Wants
Scarcity forces us to make
choices about…
• What to produce?
• How to produce?
• For whom to produce?
ECONOMIC SYSTEMS
•Market Economy/Private Enterprise
•Command Economy/Centrally Planned Economy
•Mixed Economy
MARKET ECONOMY
Pure Price System (Capitalism)
• Decisions about scarcity
should be made free from
Decentralized
govt. control.
Laissez Faire
• Economic forces (price
system/supply & demand)
in the market should answer
the three economic
questions.
• In “laissez faire economics”,
Free Enterprise
the government should
adopt a “hands off” policy
Free Market
when it comes to economic
decisions.
Private Enterprise
Market economy continued…
• Competition and profit
motive find the most
efficient and innovative
methods of production.
• Values individualism and
self-interest.
• Individuals can best
achieve their goals if they
are allowed to have
private ownership.
• Dollar voting
Adam Smith
• Father of the market system.
• Published his ideas in his
book called “The Wealth of
Nations”.
• Believed the economy would
regulate itself if left alone.
(Laissez Faire)
• Believed those that fail to
complete fail to survive.
(profit motive)
• The “invisible hand” – the
market will solve all basic
economic questions.
• If consumers are sovereign
supply and demand will
dictate the natural flow of the
market.
Imagine…
We are trapped in this classroom for the next month. We must
survive and “make do.” Think of all the things you would like to
have with you during this month and consider what you would be
willing to pay for these things.
The catch:
We can only make use of the things we have on our possession
right now.
Your task:
• Choose one item that you think other members of the class might
be willing to purchase.
•Place this item on your desk with a posted price
•BE REALISTIC. People can only pay with the money they
actually possess (what exists in their bank accounts).
SUPPLY & DEMAND
• Now that you know how other merchants
priced their items how will it affect your
pricing of the same items?
• Were there some items that would be in
high demand because of their low supply?
• How might that affect pricing?
SUPPLY & DEMAND
• What happens when demand exceeds supply?
• What happens when supply exceeds demand?
• How does supply and demand affect choices
such as…
– Careers
– Types of cars
– Types of restaurants/food(I.e. Lobster)
• What are some recent examples of instances
where demand exceeded supply? What were
the results?
Advantages
• Market gives producer
incentive
• Market provides incentive
to hire skilled labor
• Wide variety of goods and
services are available.
• Competition encourages
good quality goods.
• Productivity is rewarded by
profits
• Market economy fosters
self-reliance.
• It is possible to become
rich.
Disadvantages
• Consumers can be
manipulated by
advertising.
• Prices and incomes may
not reflect what is best
for society.
• Boom & bust cycle
• Monopolies and
oligopolies can emerge
• Extreme income
inequality can exist.
• Environmental problems
• Job security
THE ROARING TWENTIES
• United States was the richest
country in the world.(resources
& population)
• After the war the U.S.A.
became wealthy by mass
producing consumer goods like
radio’s and cars.
• Factory workers were paid well
which meant they spent money
on consumer goods.
THE WALL STREET CRASH
• As the 20’s progressed , more
and more people were buying
shares of companies “on
margin” and these shares rose
in price.
• By 1929 share prices were
rising but profits for companies
began to decline.
• In October of 1929 panic
selling of shares forced the
value of shares to drop
drastically.(crashed)
• The stock market crash brought
an end to prosperity in the
U.S.A..
Other Causes of The Great
Depression
•
•
•
•
•
•
•
•
Demand for goods could not keep up with supply
Droughts
Wages did not increase
Farmers went bankrupt
Banks failed
Factories closed
Increase in unemployment
High rate of corporate fraud
THE “GREAT”DEPRESSION
• By 1931, unemployed people
were lining up in breadlines
since there was no
unemployment insurance.
• By 1932, 12 million people
were unemployed.
• In 1932, the American people
voted for Franklin D. Roosevelt
as president on a platform of
government intervention to get
the USA out of the Depression.
THE “NEW DEAL”
• Franklin D. Roosevelt’s
program of government
spending to help the people of
the United States against the
Depression.
• He wanted to “prime the
pump”.
• He believed that putting money
into people’s pockets was like
pouring gas into an engine to
get it started.
ALPHABET AGENCIES
CCC(Civilian Conservation Corps)
– Cut fire lanes through forests.
– Planted trees
– Worked in camps received
food and shelter. ($1/day)
WPA(Works Progress Adm.)
– Built schools, buildings &
roads
PWA(Public Woks Adm.)
– Built dams & bridges
TVA(Tennessee Valley Auth.)
– Aims were to stop floods,
make electricity and create
fertile land.
TRADE UNIONS
Wagner Act(1935)
• In 1935 Roosevelt
passed a law which
gave workers the right
to form unions.
SOCIAL SECURITY
Social Security Act (1935)
• Gave government
pensions to those who
could not provide for
themselves.
• Unemployment insurance
was introduced.
• Taxed workers to provide
money for social security.
LABOUR LAWS
FAIR LABOUR
STANDARDS ACT (1938)
• Set out the maximum
hours of work and
minimum wage laws.
Effect of WWII
• Job creation for war goods (Lend Lease
Act)
• Increase in American GNP
Demand Side Economics
(Keynesian)
John Maynard Keynes
(Keynesian Theory)
• Capitalism tends to move
through cycles
–
–
–
–
Prosperity
Recession
Depression
Recovery
• It is therefore necessary
for governments to
regulate the economy by
spending money
temporarily “priming the
pump” during recession or
depression.
prosperity
FISCAL POLICY
Increase government $
FISCAL POLICY
Decrease taxes
Decrease government $
MONETARY POLICY
depression
Increase taxes
Increase $ supply
MONETARY POLICY
Decrease interest rates
Decrease $ supply
Increase interest rates
Deficit financing
Supply Side Economic
(Reaganomics)
• Supply-siders dislike
government
involvement in the
economy and
emphasize greater
reliance on private
enterprise.
In Times Of Recession…
• Reduce corporate taxes
– Creates more profit
– Acts as incentive to enter business
• Reduce public income tax
– Increases public’s incentive to work
– Provides more money to spend
– Increased production creates demand
• Supply-siders insist that increased demand for
goods and services must come from the private
sector, not from government spending.
In Times of Inflation…
• The unrestricted
market will eventually
bring inflation under
control
Reaganomics in Action
Reaganomics
Following 1981 the Reagan administration put in action
the following policies…
• Tax cuts primarily for corporations and the wealthy
• Cut income tax 25%
• Government spending cuts in social services
• Welfare subsidies, Medicaid, food stamps
• A stable money supply
• Deregulation of the economy
• Reduced environmental, health, & safety regulations
• An aim to balance the budget.
Thatcherism in Action
Thatcherism
• Following 1979 the Thatcher government in
Britain put in action the following
policies…
–
–
–
–
Wide scale privatization
Emphasis on individual initiative
Reduced the power of labor unions
Reduced income and corporate taxes
Reaganomics: A Balance Sheet
Arguments in Favor
• A reduction in
unemployment
• A reduction in inflation
• An increase in production
• A world wide move
towards private enterprise
Arguments Against
• Growing national debt
• Growing inequalities in
income levels
• A boom and bust cycle
• The decline of the middle
class.