Lecture 1 Economic systems - Definition and Types
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Lecture 1 Economic systems - Definition and Types
- 1. Economic systems – Definition and Types February, 2021
- 2. Scarcity problem There are limited resources to satisfy
- 3. Scarcity problem Individuals and Society!
- 4. Scarcity of factors of production Land Labor Capital Entrepreneurs hip
- 5. Every society – same scarcity problem! How to distribute limited resources to people in a fair
- 6. Basic economic questions What to produce? How to produce? Who gets the products?
- 7. Economic system - Definition
- 8. Economic system - Definition ---is the way a society organizes the production, distribution and consumption of goods and services
- 9. Economic system - Types B) Command economy D) Mixed economy C) Market economy A) Traditional economy
- 10. A) Traditional economy - Definition Based on customs, tradition, religion, habits –
- 11. A) Traditional economy - Features Little or no profit / limited technology / rural
- 12. A) Traditional economy – 3 questions What to produce? – goods for survival How to produce? – farming, hunting, gathering For whom to produce? - for themselves, for
- 13. A) Traditional economy – Examples Parts of Africa, Latin America, Middle East,
- 14. A) Traditional economy – Examples Parts of Africa, Latin America, Middle East,
- 15. A) Traditional economy – Pros & Cons Positive sides Tradition is maintained Each member of society has a profound role Predictable job and lifestyle Negative sides Vulnerable to changes – cannot handle change very well Lack of resources and limited production No technology, low standard of living
- 16. B) Command economy - Definition Government makes all the economic decisions!
- 17. B) Command economy - Features Centralized power decides about everything!
- 18. B) Command economy– 3 questions What to produce? – government decides How to produce? – government planning For whom to produce? – government controls
- 19. B) Command economy– Examples USSR, Cuba, China, Vietnam, North Korea
- 20. B) Command economy– Examples USSR, Cuba, China, Vietnam, North Korea
- 21. B) Command economy– Examples USSR, Cuba, China, Vietnam, North Korea
- 22. B) Command economy– Pros & Cons Positive sides No worry for employment, housing, education, healthcare Regulation (protection of environment, socio-disabled…) Coordination of scarce resources at time of crisis Negative sides Limited innovation by individuals Consumers have no choice, no freedom Unfair to population, unrest can happen
- 23. C) Market economy - Definition Market economies are hypothetical! Only market
- 24. C) Market economy - Features Free market, no government intervention!
- 25. C) Market economy– 3 questions What to produce? – consumer decides How to produce? – companies choose For whom to produce? – based on consumer’ income
- 26. C) Market economy– Examples NONE
- 27. C) Market economy– Pros & Cons Positive sides People have more choice, can start business they like Seemingly perfect No government involvement, no taxes, no regulation Negative sides Not-existent Zero government involvement Desire for money can lead to poor quality of goods
- 28. D) Mixed economy - Definition Combination of market and command economy!
- 29. D) Mixed economy - Features Market forces + Government intervention!
- 30. D) Mixed economy– 3 questions What to produce? – businesses, consumers / government How to produce? – government set safety standards For whom to produce? – consumers/ social welfare
- 31. D) Mixed economy– Examples USA, Canada, England, Mexico, Japan, many
- 32. D) Mixed economy– Examples USA, Canada, England, Mexico, Japan, many
- 33. D) Mixed economy– Pros & Cons Positive sides Allows for freedom Anyone can be successful Innovation Negative sides Government disputes Taxes Inequality in the world, poverty
- 34. Exercise: Link the letters with numbers 1 Inuit, Amish, Bedouin belong 2 Government is responsible 3 Market forces+ Government 4 Bartering 5 Examples of market 6 Economic system 7 Scarcity 8 Entrepreneur 9 Factors of production 10 Command economy is a Way of production, distribution goods and services b None c Land, Labor and Capital d Not enough resources for wants e Person who organizes, manages of production f National defense, fire-fighting owned companies g Mixed economy h Traditional economy i Centralized power j Trading without money
- 35. Exercise: resolved! 1 Inuit, Amish, Bedouin belong 2 Government is responsible 3 Market forces+ Government 4 Bartering 5 Examples of market 6 Economic system 7 Scarcity 8 Entrepreneur 9 Factors of production 10 Command economy is h Traditional economy f National defense, fire-fighting owned companies g Mixed economy j Trading without money b None a Way of production, distribution goods and services d Not enough resources for wants e Person who organizes, manages of production c Land, Labor and Capital i Centralized power
- 36. Homework Choose one economic system (Bedouins, Amish, Inuit community, USSR, North Korea, USA, Macedonia) and by using words, pictures and interesting facts explain it in detail. The essay needs to be minimum 2 pages!
- 37. Literature, links and a song https://www.youtube.com/watch?v=djPFUgUOujY https://www.youtube.com/watch?v=5Q8WUvWIb8Q https://www.youtube.com/watch?v=rQz5q42nmL4 https://www.youtube.com/watch?v=sHkviUk_47k https://www.youtube.com/watch?v=TZGqPtzAH5k https://www.youtube.com/watch?v=AHJSSr_wrJY https://www.economicsonline.co.uk/Competitive_mark ets/Economic_systems.html https://courses.lumenlearning.com/sociology/chapter/ economic-systems/ https://www.youtube.com/watch?v=Cpqq9HXYJPM
Editor's Notes
- Scarcity means that there are not enough goods and services to satisfy the needs and wants of everyone. The source of the scarcity problem is that people have limited resources to satisfy their unlimited material wants. Read more here: https://books.google.mk/books?id=i3W3DAAAQBAJ&printsec=frontcover&dq=contemporary+economic+system&hl=en&sa=X&ved=2ahUKEwjQl5Kx_b7uAhXMBBAIHShwCqE4ChDoATAHegQICBAC#v=onepage&q=contemporary%20economic%20system&f=false
- Individuals = At a personal level, people have limited income to spend on the many items they want. Is it better to save money for a vacation or for buying a new flat? Can you afford the school you most prefer to attend or the car that you would most like to own? People don’t have sufficient financial resources to spend on ALL the things they like, such as clothes, computers, concerts, flats, vacations, sport events. Human wants are said to be unlimited because no matter how much people have, they always want more of something. Because not all wants can be fulfilled individuals must choose which ones to fulfil with limited available resources. In a world of scarcity every want that is fulfilled results in one or more other wants remaining unfulfilled. (Individuals seek to maximize their satisfaction from consuming goods and services. Because income is limited and goods have prices, they cannot buy all the things they would like to have. Therefore, they have to choose an attainable combination of goods and services that will maximize their satisfaction.) Societies = also face a scarcity problem. Money devoted to the national defense is not available for education or healthcare. Should tax money be used to purchase additional tanks or should these money be used to finance the construction of a new highway? Resources are limited and both, individuals and society attempt to choose wisely. Obtaining the greatest value from resources is the goal of economic choice. Scarcity exists when not enough of a commodity is available to satisfy all of the wants. Read more here: https://books.google.mk/books?id=i3W3DAAAQBAJ&printsec=frontcover&dq=contemporary+economic+system&hl=en&sa=X&ved=2ahUKEwjQl5Kx_b7uAhXMBBAIHShwCqE4ChDoATAHegQICBAC#v=onepage&q=contemporary%20economic%20system&f=false
- Factors of production are limited! Resources, or factors of production, are inputs used in the production of goods or services. The total quantity of resources that an economy has at any one time determines how much output the economy can produce. The factors of production are classified as follows: LAND = land refers to all natural resources, such as raw materials, land, minerals, forests, water and climate, used in the productive process. LABOR = includes all physical and mental efforts that people make available for production CAPITAL = capital or investment goods refers to goods that are used to produce other goods or services. This includes such things as machinery, tools, computers, buildings, roads. Economists don’t consider money to be capital because it is not directly used in production. ENTERPERNEURSHIP = this factor of production is a special type of labor. An entrepreneur is a person who organizes, manages and assembles the other factors of production to produce goods or services. Entrepreneurs seek profit by undertaking risky activities such as starting a new business, creating a new product, or inventing a new way of accomplishing something. Bill Gates (founder of Microsoft Corp.), Levi Strauss (founder of Levi Strauss Co.) and Henry Ford (founder of Ford Motor) are examples of highly successful entrepreneurs. These factors of production have a common characteristic: they are in limited supply. Quantities of mineral deposits, capital equipment, arable land and labor (time) are available only in finite amounts. Because of the scarcity of resources and the limitation this scarcity imposes on productive activity, output will be limited. Limited resources conflict with unlimited wants. Economics is a study of choice under conditions of scarcity.
- Almost every society in the world faces with the same problem: how to distribute limited resources to people in a way it would be fair and effective. Different societies are approaching this problem in a different way! The type of economy is determined by the extent of government involvement in economic decision making.
- The scarcity problem requires answers to basic questions, such as: What to produce? How to produce it? For whom to produce? An economic system is a set of principles based on which an economy can run and make decisions about which goods and services to produce, how to produce and exchange them. Economic system is the way resources (factors of production) are controlled within a nation and how they are distributed among the population. How these factors of production are controlled and distributed defines the economic system.
- There are lots of definitions of Economic systems, among which are: 1) Economic system is the way a society organizes the production, distribution and consumption of goods and services. It shows what does a society wants and strives to achieve. Countries must decide how to distribute its resources to meet the needs of its people. 2) Economic system is an organized way in which a country allocates resources and distributes goods and services across the whole nation. 3) An Economic system is a set of principles based on which an economy can run and make decisions about which goods and services to produce, how to produce and exchange them. 4) A country’s economic system is made up of institutions and decision-making structures that determine the economic activity. 5) Economic system is the way resources (factors of production) are controlled within a nation and how they are distributed among population
- There are 4 essential types of Economic systems: Traditional economy Command economy Market economy and Mixed economy For each of them, in the next slides, the following items are given: Definition + 3 economic questions Characteristics Examples Pros & Cons
- Traditional economy is based on culture and rituals and it is focused on the community as a whole. Small economies focused on hunting, farming and gathering are considered traditional economy. Definition: Traditional economies are economies that still produce goods based on customs, values, tradition, beliefs, habits or religion. These areas tend to be rural and not so much in making money, but surviving. Roles are defined by family. People rely on making things the old fashioned way. Way that they are doing things upon years, upon People work together for the common good. Little individual choice. People will make what they have always made and will do the same work their parents did. Exchange of good is done through bartering: trading without using money, goods for goods.
- Traditional economy is characterized by the following items: Minimal waste Rural conditions Little to no profit –farming, gathering, hunting Limited technology
- Traditional economy answers the three economic questions in the following way: What to produce? Who decides what to produce? People follow their customs and make only what is needed to take care of themselves. They rely on old-fashioned way. They are doing what they ancestors did in the past. Roles are defined by the family (community). 2) How to produce it? Who decided how to produce goods and services? People grow and make things the same way that their ancestors did. 3) For whom to produce? For whom are the goods and services produced for? Self and trading purposes (people in the village who need them).
- Examples of traditional economies: -Parts of Africa (Sub-Saharan region) – Bedouins -Parts of Latin America -Parts of the Middle East – Amish community -Parts of Asia - Inuit cultures (Eskimos of North America and Canada)
- Examples of traditional economies: -Parts of Africa (Sub-Saharan region) – Bedouins -Parts of Latin America -Parts of the Middle East – Amish community -Parts of Asia - Inuit cultures (Eskimos of North America and Canada)
- https://www.youtube.com/watch?v=djPFUgUOujY
- Command economy relies on the government to make all economic decisions, including allocating and distributing resources and regulating prices. A central authority makes all decisions regarding production, distribution, salaries, investments and prices. Definition: Command economies are economies that are typically controlled from one place, the government. Government makes all decisions on what and how much to produce. Government also decides values and pay. Government decides where people will work. It owns most of the property. Command economy is known as planned economy, or centrally-planned economy. Scarce resources are allocated by government or some central body. Government direct / command resources to be used in particular ways.
- Command economy is characterized by the following items: Centralized power Government ownership of the factors of production (resources, land, supplies, factories) Usually socialist or communist style setup that allows this to happen Government tries to ensure that the wealth is distributed equally
- Command economy answers the three economic questions in the following way: What to produce? Who decides what to produce? Government makes all the economic decisions. (government preferences). Government manages all or most resources and industries. The government exerts control over the allocation and distribution of all or some goods and services. Government decides about social needs. 2) How to produce it? Who decided how to produce goods and services? Government decides how to make goods and services 3) For whom to produce? For whom are the goods and services produced for? Whoever the government decides to give them to.
- Examples of command economies: - USSR (ex, former Soviet Union) China Cuba Vietnam North Korea This system has not been very successful and more and more countries are abandoning it.
- Examples of command economies: - USSR (ex, former Soviet Union) China Cuba Vietnam North Korea This system has not been very successful and more and more countries are abandoning it.
- Examples of command economies: - USSR (ex, former Soviet Union) China Cuba Vietnam North Korea This system has not been very successful and more and more countries are abandoning it.
- https://www.youtube.com/watch?v=djPFUgUOujY
- Market economy relies only on the market forces – demand and supply! No government involvement. Resources are allocated through the interaction of free and self directed market forces. Self-interest is at the heart of free market economies. Free market system is an economic system that allows supply and demand to regulate prices, wages, ….rather than government. In a free market, competition dictates how goods and services will be allocated. Companies produce goods and services that are wanted by consumers. Consumers will buy these goods and services in order to maximize their utility. At the same time, companies must produce qualitative products because they are in severe competition with others. Definition: Market economies are hypothetical. A market economy is where all production and consumption is controlled by the market, by supply and demand. Companies only produce what will be consumed and the people only want what is produced. All resources are privately owned. It is a perfect economy and it doesn’t exist.
- Market economy is characterized by the following items: Free market (supply & demand) Zero government involvement
- Market economy answers the three economic questions in the following way: What to produce? Who decides what to produce? Whatever the market demands and that will produce profit. 2) How to produce it? Who decided how to produce goods and services? Companies, based on research on consumer needs and wants. 3) For whom to produce? For whom are the goods and services produced for? Consumers who demand the products and are willing to pay. Government is not involved. Resources are distributed based on supply and demand.
- Examples of market economies: NONE This economic system is perfect and non existant.
- https://www.youtube.com/watch?v=djPFUgUOujY
- No one economy in the world is purely market or planned. Definition: Mixed economies are economies that are a combination of market forces and central planning. They have a private sector where resources are allocated privately by market forces plus a public sector where resources are allocated mainly by government (defense, police, fire-services). Resources are allocated by a combination of market and planning, such as healthcare. This economic system utilizes limited government involvement while also applying free market concepts. There is a balance between consumer choices and government control. If the economy gets into trouble, for example, the government intervenes.
- Mixed economy is characterized by the following items: Market, more or less free of government Some state-run enterprises Individual liberties
- Mixed economy answers the three economic questions in the following way: What to produce? Who decides what to produce? Determined partly by consumer preferences and partly by government 2) How to produce it? Who decided how to produce goods and services? Partly by producers seeking profit and partly by government 3) For whom to produce? For whom are the goods and services produced for? Determined partly by purchasing power and partly by government preferences
- Examples of mixed economies: USA Canada England Mexico Japan Many European countries
- Examples of mixed economies: USA Canada England Mexico Japan Many European countries