3 Primary Economic SystemsDifferent Economic Systems Explored

Economics

Economic Systems

• All economic systems allocate scarce resources

• Every society must choose both an economic & political system

3 Basic Questions

Every Economic System must answer 3 questions:

1) What to Produce?

2) Whom to Produce it for?

3) How to Produce it?

3 Types of Economic Systems

• MARKET

• COMMAND

• TRADITIONAL

Adam Smith (1723-90)

• Founder of Free Market Economics– He wrote “The Wealth of Nations” in 1776

• Argued: Free markets best promote the social welfare

• Government should not interfere in markets!– The economy is self-regulating through an invisible hand

"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”

“We address ourselves, not to their humanity but of their advantages."

Adam Smith

Self-interest is our incentive to work hard

Reading: “Self-Regulating” Free Market

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Adam Smith’s 2 laws of the Market

• 1) Self-Interest:• People act in their own self-interest

• Profits or greed motivate individuals (incentive)

• 2) Competition:• Lots of producers keep business “honest”

• Since business “fears” competition goods are produced at the lowest possible price

Adam Smith 2 Laws in action:

People follow their own self-interest

Threat of competition keeps people honest

Markets naturally self-regulateInvisible Hand

Government should notInterfere!

Command Economy

• Soviet Union “adopted” command economic system– Called communism

• Government controlled economy (centrally planned)

– stressed equality & work for the common good (collective system)

• Economic Incentive to work hard?

Karl Marx

1848

For the collective good!

Self-Regulation vs. Central Planning

• Market Economy • Command Economy

Shortage ofA Good?

Cuba’s Future?

• https://www.youtube.com/watch?v=r3ZnaLuqMCo

Traditional Economic System• Designed to preserve culture of society

• Change occurs very slowly

• Gov’t uses strict laws to enforce behavior

CHINA

Bhutan Video: Traditional Economy

Benefits Costs

https://www.youtube.com/watch?v=CXJwNSkdTH0

https://www.youtube.com/watch?v=2jf9xrnUjpI11 min.

https://www.youtube.com/watch?v=SPujYdcWCFU3 min

Bhutan June 2011

Typical Village

No traffic lights in Bhutan2011 Music Video production in Bhutan

Society will choose an economic system based on goals: Economic & Social

Which Economic System?

•Justice

•Equality

•Environment

•Freedom

• Growth

• Employment

• Efficiency

• Stability

GEES-Growth, Efficiency, Employment, Stability

HOW WHAT FOR WHOM

MARKET

COMMAND

TRADITIONAL

Economic System

Production

Growth &

Efficiency

Supply &

Demand

Price

Equality

Gov’t or

Central

Planner

Gov’t or

Central Planner

Need &

Tradition

Need

NecessityStability

GEES-Growth, Efficiency, Employment, Stability

Summary

• Market systems stress competition– Work “individually” in your own “self interest”

– Invisible hand regulates economy

• Command systems stress equality– Work “collectively” for the common good

– Government centrally plans economy

• Traditional systems stress preservation of culture– Government maintains culture of society

Economic Systems Worksheet