Economic Systems

Economic Systems
Four main types
1. Reliance on Technology and Capital Goods
Assembly line [roundabout production] results in more efficient production

and more output. Farmers are more efficient using capital goods [plows & tractors] instead of their hands.
Roundabout Production
2. Specialization and Efficiency

Makes Use of Differences in Ability
[slow person can fish & fast person can be a hunter]
Fosters Learning by Doing
Saves Time
Division of Labor
Geographic Specialization
Texas
Florida
Nebraska
3. Use of Money
As a Medium of Exchange
3. Use of Money
Money Eliminates Barter System Difficulties
Unlimited Wants
WHAT G/S
to produce?
Scarcity Choices
HOW will the
G/S be produced?
Businesses
Limited Resources
WHO will receive
the G/S produced?
Most needy or most money

BASIC ECONOMIC PROBLEMS
Answers to the above determine:

ECONOMIC SYSTEMS
[Eskimo/pygmy]
TRADITIONAL
COMMAND
FREE MARKET
Economic Systems
the way society produces products
1. Traditional 2. Pure Command 3. Pure Market 4. Mixed a. Capitalism b. Democratic Socialism c. Authoritarian Socialism [Communism] The way the 3 basic questions are answered Determines an economic system.
1. Traditional-[where CUSTOM RULES]

A. What, how, and for whom are answered by tradition B. Change is resisted, no technology [clashes with tradition] C. Heredity and caste system limit the economic role of individuals. D. 35,000 Pygmies in the Ituri Forest are an example. E. Men hunt & women/children gather/prepare food. F. Wear loincloths from bark of fig trees [PYGLER or PYBUGLE Boy] G. Eat mushrooms, berries, roasted grasshoppers, monkeys, & plantain H. Eat bone marrow & everything else in an elephant. I. Used to be big Pygmies, have to wear
The Market System
PRIVATE PROPERTY
ROLE OF
SELF-INTEREST
FREEDOM OF ENTERPRISE & CHOICE
COMPETITION
MARKETS & PRICES
ACTIVE, BUT LIMITED, GOVERNMENT
1. Private Property the right of individuals to exercise control over things owned. Freedom to negotiate binding legal contracts. Contracts are legally binding in oral or written form. [A verbal agreement is binding only if it involves a small sum of money over a short period of time and does not involve real estate purchases.] 2. Freedom of Enterprise (business) & Choice Can move within the economy to any job, to buy or sell property, or start a business.
The consumer is sovereign (king) in the economy. His dollars vote as it is he who decides what gets produced. The U.S. has over 100,000 business failures each year.
K-Mart?
3. Role of Self-Interesteach producer or consumer tries to do what is best for themselves. Self interest is the main force driving the economy. Producers aim for maximum profits. Consumers seek the lowest prices & highest quality.
Pure Capitalism and the Circular Flow

[Capitalism private ownership of capital] 4. Competition economic rivalry of a large number of buyers & sellers. [central mechanism of market economy] Monopolies become fat & unresponsive to consumers (higher prices & fewer choices). Competition prevents one seller from controlling the market. Monopolies are price makers. It is better to have price takers who are at the mercy of the market.
And an appendage to be named later, like a -
Competition and
self-interest are like an invisible hand.
Monopolies can charge
an arm and a leg.
5. Markets & prices. Markets bring the buyers and sellers into contact.
Prices send signals. High prices send signals to increase production and for other producers to enter the market.
Low prices send signals to decrease production and for producers to exit the market. 6. Limited Government Intervention in the economy. The role of government was one of laissez faire. [hands off] In the words of Adam Smith, the government should not interfere with the operation of the economy except serve as an arbitrator in settling disputes. The governments role: (according to Smith) a. provide defense, b. administer justice, and Arbitrator c. maintain certain public institutions. [settling disputes]
Adam Smith said the invisible hand determines what gets produced, how, & for whom. It is the invisible hand that moves us along the PPC. The invisible hand is now called the market mechanism. Its essential feature is the price signal.
The Case for the Market System Efficiency, Incentives, and Freedom
achieve objectives in a short period of time Weakness: government pursues policy not reflective of majority; inefficient information network
Karl Marx 3. PURE MARKET where

INDIVIDUALS RULE. Individuals and firms control all resources. The government has no say. WHAT, HOW & FOR WHOM are decided by individuals.
Adam Smith MIXED all countries have mixed economic systems

How are these words used in everyday life?
1. Traditional
2. Command
3. Market
A mixed economy is one that uses both market signals and government directives to allocate goods & resources. Most economies use a combination of market signals and government directives to select economic outcomes.
ADAM SMITH
WEALTH OF NATIONS 1776 The INVISIBLE HAND when individual consumers/
producers compete to achieve their own private self-interest.
The role of government [LAISSEZ-FAIRE HANDS OFF] is limited to national defense, public education, maintaining the infrastructure, and enforcing contracts. Smith said the market system was best because it encouraged specialization, resulting in increased output & more economic growth. No G Government was like an INVISIBLE FOOT government action to benefit particular groups. Keynes will say the G can act as a pressure In loving memory
gauge,
letting off excess steam or building it up as needed. [active-not all inclusive role]
of mercantilism
My name is mercantilism.
Smiths book was an attack on mercantilism. Mercantilism Wealth doesnt come from an accumulation of gold and silver but from more productive people. A nation is wealthier if its citizens Are more productive. It is the ability of people to produce products and trade in free markets that creates a nations wealth.
So mercantilism died as economic theory.
Adam Smiths famous Pin Factory Example

One man could do maybe 1 pin per day [1 man = 1 pin] Now if there is specialization 1 man draws the wire out 1 man straightens the wire 1 man cuts the wire 1 man sharpens the point 1 man flattens the head There are 18 distinct operations - some perform 2 or 3 operations 10 people do 48,000 pins per day 1 man = 4,800 pins per day
Three circumstances come from this specialization.

1. Increased dexterity (learning by doing) 2. Saving time (lose time when you move to different operations) 1. Invention of machines (fosters inventiveness)

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Economic Systems

Four main types

1. Reliance on Technology and Capital Goods

Assembly line [roundabout production] results in more efficient production

1. Reliance on Technology and Capital Goods

2. Specialization and Efficiency

Fosters Learning by Doing

1. Reliance on Technology and Capital Goods

2. Specialization and Efficiency

1. Reliance on Technology and Capital Goods

2. Specialization and Efficiency

1. Reliance on Technology and Capital Goods

2. Specialization and Efficiency

1. Reliance on Technology and Capital Goods

2. Specialization and Efficiency

Most needy or most money

Answers to the above determine:

the way society produces products

1. Traditional-[where CUSTOM RULES]

The Market System

FREEDOM OF ENTERPRISE & CHOICE

MARKETS & PRICES

ACTIVE, BUT LIMITED, GOVERNMENT

Pure Capitalism and the Circular Flow

And an appendage to be named later, like a -

Monopolies can charge

an arm and a leg.

Karl Marx 3. PURE MARKET where

Adam Smith MIXED all countries have mixed economic systems

producers compete to achieve their own private self-interest.

So mercantilism died as economic theory.

Adam Smiths famous Pin Factory Example

Three circumstances come from this specialization.

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