Economic system of society. Unit 2 презентация

Economic systems of society
Topics:
1. Definition and meaning (What is an economic system). Types of economic systems.
2. Economics goals and types of economic systems.
3. The economic problem and economic systems.
4. Key-words and terms

Aims and objectives
Aims:
1) Introduce types of economies;
2) Introduce special vocabulary.
Objectives:
1) Show presentation;
2) Show vocabulary (key-words and terms;
3) Be ready for testing

References:
Alberto Bisin (2011) Introduction to economic analysis, Dept. of Economics NYU
William A. McEachern (2006) Economics: A Contemporary Introduction, University of Connecticut
Carl Menger (2007) Principles of economics, Ludwig von Mises Institute
The economic problem and economic system https://faculty.etsu.edu/hipples/ProbSys.htm

1. What is an economic system?
An economic system is an organized way in which a country allocates resources and distributes goods and services across the whole nation or a given geographic area. It is includes the combination of several institutions, entities, agencies, decision-making processes and patterns of consumption that make up the economic structure of a specific community. Hence it is a type of social system.

An economic system defines how all the entities in an economy interact. Defining them today is much more complicated than it used to be.
Ancient systems were relatively simple – trade was carried out using barter and there were very few treaties and rules of engagement.

An economic system defines how goods and services are produced, distributed and at what price. There are three main types: a market, planned and mixed economy.

Different Economic Systems
Scarcity refers to the limited supply of something
Every country must deal with the problem of scarcity since no country has everything that its people need/want
Every country must develop an economic system to determine how to use its limited resources to answer the three basic economic questions:
What goods/services will be produced?
How will goods/services be produced?
Who will consume the goods/services?
The way a country answers these questions determines its economic system

2. Economic goals and Types of Economic Systems:
Economic Systems
Traditional
Economy
Command
Economy
Market
Economy
Mixed
Economy

2.1. Economic goals
Society’s answer the three economic questions, and thus determine the type of economic system they use, based on their economic goals and societal values → it is impossible to pursue all goals equally, therefore, in pursuing certain goals, society’s will pay an opportunity cost in pursuing other goals
No matter the type of economic system a society employs, it must answer the following three economic questions:
1. What goods and services should be produced?
→ What are we going to make?
2. How should these goods and services be produced?
→ How are we going to make it?
3. Who consumes these goods and services?
→ Who gets the stuff we make?

Economic efficiency → making the most of resources
Economic freedom → freedom from government intervention in the production and distribution of goods and services
Economic security and predictability → assurance that goods and services and the ability to pay for them will be available and a safety net (unemployment insurance, FDIC, social security, etc.) will protect individuals in times of economic difficulty
Economic equity → fair distribution of wealth
Economic growth and innovation → innovation leads to economic growth, and economic growth leads to a higher standard of living
* Society’s can pursue many other goals such as stability and environmental protection, but we will focus on the list above

Economic systems today are complex
In ancient societies, people only exchanged what they had for what they wanted or needed. Today, however, in monetary economies, the setting is much more sophisticated.
We currently live in a society where massive corporations have a strong influence on how business is done. Agreements and treaties are negotiated and signed every day, and governments have made many laws concerning trade, which means we require a much more comprehensive definition of what an economic system is.

Different Types describes an economic system as an organized manner in which a particular government has chosen to allocate its country’s goods and services.
Systems in today’s economies are about much more than simple trade. They define our society’s values and its political structure.
Every economic system looks at three or four basic questions:
What to produce ?
How to produce and how much ?
Who receives production’s out-put ?
How change is going to be effected and accommodated.

The structure of each economic system seeks to answer these three or four questions. The system sets the rules of play for all the players in an economy, and defines how they can interact with one another.
The study of economic systems looks at how their various components are interlinked, how information flows between them, and their social relations, including the structure of management and property rights.
The analysis of economic systems used to focus on two extremes – planned and market economies, and on the differences between socialism and capitalism.
Today the classification of economic systems has expanded to include other models and topics that do not conform to those traditional extremes. Globally, the currently dominant form of economic organization is based on varying versions of a market-oriented mixed economy.

Economic Systems
Economic Systems – method used by a society to produce and distribute goods and services
Each type has its own solution to questions: what, how much and for whom provide goods and services.

Types of Economic Systems:
Traditional Economy
– relies on habit, custom, or ritual to decide questions of production and consumption of goods and services
little room for innovation or change
revolves around the family

Types of Economic Systems:
Market Economy
– decisions on production and consumption of goods and services are based on voluntary exchange
choices are made by individuals

Types of Economic Systems:
Mixed Economy
– market-based economic system in which the government plays a limited role
most modern economies!!

Types of Economic Systems:
Command Economy
– a central authority is in command of the economy
central government makes all the decisions

Comparing Mixed Economies
An economic system that permits the conduct of business with minimal government intervention is called free enterprise. The degree of government involvement in the economy varies among nations.

Countries Economic Systems:
Traditional
Market
Mixed
Command
?
?
?
?

3 Economics
WHAT goods and services should be produced?
HOW should these goods and services be produced?
FOR WHOM should these goods and services be produced?
Traditional
Economy
Command
Economy
Market
Economy
Mixed
Economy

Traditional economies
The highest goals of people in a traditional economy are economic stability and security. Most want nothing more than to live as they always have, following traditional ways of life, in harmony with nature. For most traditional societies, though, this goal is increasingly difficult to attain. Traditional economies have become shrinking outposts of the past surrounded by the modern world. As modern economies exert an ever-growing influence, traditional societies are struggling to find a path to economic survival.

Do you know any barter countries?
Which ones?

Inuit (North America)

Command economies
Rulers at the top of these early civilizations—kings, pharaohs, emperors—commanded the populace to devote economic resources to building projects or military adventures. Many thousands of people might be conscripted to build a pyramid, defensive wall, irrigation canal, temple, or road. In a preindustrial age, such projects took vast quantities of human labor. Often, many people would be drafted into a ruler’s army and sent into battle in distant lands.

Can you tell us, what countries do u know with command economy?

North Korea

Market Economies: Decision Making by Individuals
The newest economic system to emerge in human history is the market economy. A market economy depends not on tradition or command to coordinate its activities but on the decisions of individual producers and consumers. Note that when economists speak of “the market,” they are referring to the economic system within which buyers and sellers exchange goods and services. This is distinct from an everyday market, which is a place where people buy and sell goods.

USA

3. The economic problem and economic systems
The economic problem emerges because our desire for goods and services to consume is greater than our ability to produce those goods and services. The demand for goods and services arises from human wants. There are three types of human wants.
Biological wants are for the goods and services needed to sustain human life. These are food, shelter, and clothing. These goods are often called "necessities".
Cultural wants for are for goods and services beyond necessities in order to maintain the socially accepted standard of living. The idea of a standard of living will vary with time and place. An acceptable living standard for 1800 would not be acceptable in 2000. These goods and services are called "conveniences".
Demonstration wants are for goods and services beyond conveniences. Thanks to modern telecommunications, we all know about the lifestyles of the rich and famous, and would not mind it for ourselves. These goods and services are called "luxuries". Note that economic development means that the luxuries of yesterday become the conveniences of today!
Economists assume that human wants possess a critical characteristic that I will state as a proposition.

We have never seen any human society enjoying want saturation, including the United States today. Sadly, the developing nations of the world often cannot even provide for life sustaining biological wants.
The supply of goods and services results from the production process. In production, various inputs are brought together and combined to create goods and services. These inputs are classified into the three "factors of production".
Land is natural resources or our endowment from nature. The payments for the use of land are called "rents" and "royalties".
Labor is all human effort, both physical and mental, used in production. The payments for labor are "wages" and "salaries".
Capital is all goods used to produce other goods and services. Capital is also called "producer durables". Capital has to be produced, and to get more capital we must reduce our production of consumer goods. The payments for capital are "interest" for debt (borrowed) capital and "profits" for equity (owner supplied) capital.
The factors of production are versatile and may be combined in different proportions to produce the same thing. The United States is capital abundant and uses machinery intensively for farming. China is labor abundant and uses people intensively for farming.
The factors of production possess a critical characteristic.

The Economic Problem: The wants of a society for goods and services to consume will always exceed the ability of that society to produce goods and services.
This problem poses serious policy questions to all nations, the advanced as well as the less developed. For the less developed, it is often a cruel dilemma for their economies are often hard pressed even to furnish the biological necessities. "Poverty" in the Third World is not the same as "poverty" in the United States.

Let us repeat
1) Traditional Economy
centers on families, clans, or tribes
decisions are based on customs and beliefs
Good of the group always comes before individual desires.
Can you reckon some pluses and minuses of Tradition economy ?

Tradition economy
Advantages and Disadvantages
Advantages: little disagreement over goals, roles
methods of production, distribution determined by custom
Disadvantages: as result of resistance to change, less productive
do not use new methods; people not in jobs they are best suited for
low productivity results in low standard of living

Let us repeat
Command Economy….
Who can tell about this?
You can work together ☺

Command Economy
(centrally planned economy) government (or a king, a leader, a marshal) makes economic decisions
determines what to produce; how to produce; who gets products
determines who is employed, work hours, pay scales
Wants of individual consumers rarely considered
Government owns means of production: resources and factories

Let us repeat
Market Economy (no interruption from government)
driven by choices of consumers and producers
consumers spend money, go into business, sell their labor as they wish
producers decide how to use their resources to make the most money
Consumers, producers benefit each other when they act in self-interest

Let us repeat
Mixed economy
has elements of traditional, command, market systems
most common type of economic system
Traditional, command, market economies adopt elements from others

Types of Mixed Economies
U.S. basically has market system
European countries greater mix of market and command elements
France—government controls some industries; provides social services
Sweden—state owns part of all companies; lifelong benefits, high taxes
Namibia—traditional; state supports market, foreign investment

NOTES:
1. The Industrial Revolution began in England and France in the 1700s, and has now spread throughout the world. The Traditional form of economic system cannot be used in an industrial society. Capitalism, Fascism, Socialism, and Communism are all modern (1800s and 1900s) attempts to develop an economic system for an industrial society.
2. All industrial societies have extensive use of capital goods, extensive division of labor, and have indirect exchange based upon the use of money.
3. State ownership of resources under Socialism and Communism reduces the choice of production techniques. The selected techniques are usually labor intensive since these societies are more concerned with full employment rather than growth.

4. Communism through its complete state ownership and control of resources is very close to the Traditional form of economic system.
5. In Pre-Industrial Europe (before 1500), the Traditional form of economic system is called Feudalism. During the Renaissance (1500 to 1700), as Europe moved towards the first industrial society, the transitional economic system is called Mercantilism. Mercantilism combined features of both modern Fascism and Socialism.

Key-words and terms
Centrally planned or command economy –an economy where all economic decisions are taken by the central authorities.
Free-market economy – an economy where all economic decisions are taken by individual households and firms and with no government intervention.
Mixed economy–an economy where all economic decisions are taken partly by the government and partly through the market.

Key-words and terms
Planning – establishment of objectives for man and organization and determination of the best ways to accomplish them.
Nationalization – the process under which private industries become state owned industries.
Tax – a charge, monetary as a rule, imposed by authority upon persons or property for public purposes.

Key-words and terms
Subsidy –monetary grant or gift.
Partnership –unincorporated business owned and operated by two or more persons under a voluntary legal association.