economic systems: goals methods developed by different societies as per their individual goals and...
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Economic Systems: Economic Systems: GoalsGoals
Methods developed by different
societies as per their individual
goals and needs.
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Economic Systems…
Definition:
It is a system through which each economy decides how to allocate the national resources, production, and consumption within the Economy.
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Types of Economic Systems
There are four types of Economic Systems.
1- Traditional Economic System 2- Command (Planned) Economic System 3- Market Economic System 4- Mixed Economic System
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Every society must ask 3 Key Questions…
• 1) What goods and services should be produced?
• 2) How should these goods and services be produced?
• 3) Who will consume these goods and services?
• The way a country answers these questions determines its economic system.
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The Three Questions
• We will see that every Economy can be classified to which of the four forms of Economic Systems they belong by answering these three simple Questions.
• What?• How?• Who?
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1.) What to Produce?
This question attempts to determine which sort of goods and Services will be produced in an economy.
• What are society’s needs and wants?•What resources should be used?•What are the opportunity costs? •Should we be manufacturing more necessities or Luxuries?
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2) HOW to produce:
• What resources to be used and/or developed to produce goods
• Land + labor + capital = product• Should we rely on Human Resources such as
Labor? • Or should we use more Capital instead such as
machines?• How much quantity should we employ of each
of them? • Training required to produce and/or serve
Once we have decided what to produce, we have to decide how we should produce these goods and services.
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3) For whom to Produce?
• This question relates to the final market of the goods and services we are going to produce.
• Whom are we going to sell these goods and services?
• Should we produce for rich people or the middle class?
• Should we produce for youth or the elderly?
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• Distribution of products • Societies must decide how to distribute? the available goods and services
• This question is answered by how societies decide to distribute income:
• They do this with
• Factor Payments: Factor Payments: • The income people receive for supplying
factors of production • (land, labor, capital, and entrepreneurship)
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• Ex. 1.) Landowners receive rent
• 2.) Workers receive wages,
• 3.) Those who lend money to build factories or buy machinery receive payments called?
• Interest
• 4.) Entrepreneurs earn profits if their enterprises succeed
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• How much?• How much should we pay the owners of
the factors of production?• How do we decide how much a
particular piece of land is worth?• How much should Ms. Morse really
earn?• How much should your doctor earn?• How much should Stephen Curry earn? • Or, what should the interest rate be?
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Social Values and Goals! Social Values and Goals! • This is the heart of the differences
between economic systems today.
Each society answers the questions of distribution
based on its unique combination of social
values and goals
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Goals and Values
• 1.) Economic Efficiency (production distribution)• Maximizing output of goods and services from the resources available
• 2.) Economic Freedom patriotism• Allowing individuals to make economic choices about earning income, owning
property, and purchasing goods and services.
• 3.) Economic Equality (production = access ?)• Dividing resources in a way that is considered fair
• 4.) Economic Security & Predictability • Assuring people that goods and services will be available: providing aid for
retirement, in difficult times, injuries, layoffs, natural disasters safety net
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5.) Economic Growth & InnovationA nation’s economy must grow for a nation to improve its standard of living (economic prosperity)
•Additional Goals
environmental
full employmentmedical care
Prioritize:No matter how a nation prioritizes its goals, one fact remains the same:Achieving any economic goal comes only with some kinds of economic trade-off
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Economies and Values
ECONOMIC SYSTEMS
Traditional Economy Market Economy Mixed EconomyCentral or Command
Economy
Oldest formOf economic
Systems
Bartering
AgriculturalAnd resource
Based
Immediateneeds
As in WesternEurope
The market &consumer
DeterminesSupply &Demand
Central Gov’tDeterminesWants &
Needs of the Consumer
Focus on In-dustrial goodsAnd little on Consumerdemands
In the US,Both Market&
CommandSystems are
used.
Market forcesControl mostConsumer
Goods
Gov’t directsIndustry in
Need areas