4 Economic Systems of Gov’t: Market Economy Command Economy Mixed Economy Traditional Economy

4 Economic Systems of Gov’t:

• Market Economy

• Command Economy

• Mixed Economy

• Traditional Economy

Economic Systems

• A country’s economic system answers the 3 basic questions:

• A. what to produce

• B. how to produce it

• C. for whom it is produced

Market Economy-also known as capitalism-these decisions are made in free markets by the

interaction of supply and demand.

• Private citizens own the factors of production-not the gov’t

• Businesses are driven by profit-motive and decide what to produce

• Consumers make their own decisions about what to produce

• Supply and demand interact to set price; producers and consumers base their decisions on price

• A market economy is decentralized-decisions are made by all the people, not just a few.

Role of gov’t in US Economy

• Provides public goods and services

• Regulates businesses to make sure markets stay competitive

• Works to reduce negative externalities and increase positive externalities

Command Economy-central gov’t makes the major economic decisions

• Individuals have few choices and little influence over the economy

• Also called controlled economy, socialism, or communism

• Gov’t owns most productive resources, especially land and capital

• Gov’t makes the 3 basic decisions

• Gov’t fixes the wages of workers and sets prices

• Command economies can be very ineffieient resulting in slower growth and lower GDP (Gross Domestic Product). – Two leading command economies are Cuba and North Korea.

Mixed Economy-combines basic elements of a pure market economy and a command economy.

• Combines private ownership or property and individual decision-making with gov’t intervention and regulations.

• The US is a mixed economy-where individuals make decisions based on market phenomena.

• Our gov’t makes laws to protect private property and regulate areas of business.

Today, many nations have changed from command economies to more of a market economy.

• For example, countries in the former Soviet Union and even China are making strides toward a more market economy.

• Command economies were not able to achieve the economic growth that market economies had.

• The Soviet Union broke into separate countries in 1991 b/c Communist leaders cound not keep the economy going.

• It has been a difficult transition for the Russian economy.

• State owned factories have been switched to private ownership, stock markets have been created, etc.

• In the 1980’s, China began to introduce market reforms and began to convert factories to private ownership. It also set up a stock market.

• This has resulted in a growing economy over the past 30 years.

Traditional Economy-economic decisions of what, how, and for whom to produce are based on custom or habit.

• The country’s economy and way of life are passed down from generation to generation.

• Decisions are usually made by a small group, tribe, or religious sect.

• They are usually poor, developing countries with a high rate of population growth and a declining GDP.

• People have a smaller share of what the economy produces.

• Traditional economies are usually landlocked and do not have access to ocean trade; others lack many natural resources

• Many developing traditional economies have suffered through civil wars that have destroyed roads, bridges, factories and other resources.

• Some traditional economies borrow large sums of money to spur economic growth which means they owe more money than the GDP they produce in a year.

Assignment: Due 11/09/09

• Fold the legal size paper so that you have four quadrants

• Label each quadrant with one of the four economic systems of gov’t

• Illustrate each of the economic systems – Illustrations must include color

Systems of Government

• Quiz answers

Anarchy__1. absence of governmentCommunism__2. authoritarian party that controls the economy; government of China and the former USSRTheocracy___. government where the ruler is considered divineDictatorship__4. government that takes over by force or fearDemocracy__5. government based on the rule of the peopleMonarchy__6. government ruled by an individual who is usually a king or queenAutocracy__7. rule by one personOligarchy__8. rule by a group of personsAuthoritarian__9. type of government where power is held by an individual or group who is not accountable to citizensTotalitarian__10. type of government where the ruler changes all areas of the government or country

A. totalitarian

B. autocracy

C. monarchy

D. oligarchy

E. anarchy

F. authoritarian

G. communism

H. dictatorship

I. theocracy

J. democracy

11. Identify a dictator and his country. Castro/Cuba; Hitler/Germany; Hussein/Iraq12. Name the type of government in which the federal and state governments share power. federalism

ECF Records Company

• ECF records produced 5,000 CDs last month. It sold each of these CDs for $10. The rent for the studio was $3,000/month. Power to operate the machines cost $500. The costs for the musicians were $12,000. The commercial printer cost $400 per month to rent. The materials used to produced the CDs, cases, and packaging were $4,000.

1. Identify the capital good(s) mentioned above.

• Any machines

• Commercial printer

• Materials used to produce the CD’s, cases, and packaging

• Studio

2. Identify other resources used for production.

• Musicians

• Power

3. Were there any natural resources (land) used? If so, what?

• Approximately half an acre of land

4. Identify the fixed costs; calculate the total fixed costs.

• $3,000 Rent

• $400 Printer Rent

• $3,400 = total fixed cost

5. Identify the variable costs; calculate the variable costs.

• $500 Power

• $12,000 Labor

• $4000 Packaging and Materials

• $16,500 total variable cost

6. What is the total cost? Calculate the total cost.

• Total Cost- addition of variable and fixed costs

• $3,400

• $16,500

• $19,900 = Total Cost

7. Define average total cost; calculate the revenue generated.

• Average total cost- when a business divides the total cost by the quantity produced to calculate cost per good.

• $19,900 divided by 5,000 CDs = $3.98 per CD produced

8. Define revenue; calculate the revenue generated.

• Revenue- incoming funds

• 5,000 CDs multiplied by the $10 cost of each CD = $50,000

9. Define profit; calculate the profit.

• Profit- the amount of revenue left after total costs have been deducted

• $19,900 subtracted from $50,000 = $30,100

10. Define opportunity cost.

• Opportunity cost- what is given up when another choice is made

11. What would be the opportunity cost of purchasing four CDs for someone who loves cheeseburgers if a cheeseburger costs $5?

• 8 cheeseburgers

12. If it costs $19,901 to produce 5,001 CDs, what is the marginal cost of producing another CD?

• 5,000 = $19,900

• As compared to

• 5,001 = $19,901

• Then the one extra CD costs $1.00 as compared to the $3.98 per CD for the first 5,000 CDs produced

13. If the selling price remains constant, what is the marginal benefit of selling another CD?

• $3.98 - $1.00 = $2.98 is the marginal benefit of selling another CD

14. Assuming the factory can sell additional CDs, would it be profitable to produce more? Why or

why not?

• Yes, it would be profitable to make more CDs because the additional CDs are much less expensive to produce and will result in additional profit per CD.