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Alternative Economic Systems
Learning Plan 4
Alternative Economic Systems
• Questions
• 1. Why does the scarcity problem force all
societies to answer the questions what,
how, and for whom?
• 2. How can economies be classified?
• 3. What are the characteristics of an
command socialist economy?
• 4. What are some problems that command
socialist economies face?
Economic Systems
• Economic System is the institutional
means through which resources are used
to satisfy human wants.
Economic Systems
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Unlimited wants/ scarce resources
Rules
Channeling competition
Resolving conflict
Laws
Customs
Economic Systems
• 1. Capitalism. An economic system in
which individuals own productive
resources; these individuals can use the
resources in whatever manner they
choose, subject to common legal
restrictions.
• A. Property rights. The right of an owner to
use and to exchange property.
Economic Systems
• Socialism. An economic system in which
the state owns the major share of
productive resources except labor.
Socialism also usually involves the
redistribution of income.
Economic Systems
• Communism. An economic system in which
the state has disappeared and in which
individuals contribute to the economy
according to their productivity and are
given incomes according to their needs.
• In pure communism, we would see the
absence of economic class distinctions.
• Centrally planned (command) economies.
Economic Systems
• Two classifications
• 1. Market System. A system in which
individuals own the factors of production
and decide individually how to use them; a
system with decentralized economic
decision making
Economic Systems
• 2. Command System. A system in which the
government controls the factors of
production and makes all decisions about
their use and about the distribution of
income.
Economic Systems
• No matter what the system, the
fundamental economic problem of scarcity
must be solved.
• Every economy faces opportunity costs in
making decisions.
3 Basic Economic Questions
• Resource Allocation
• The assignment of resource to specific
uses determining what will be produced,
how it will be produced, and for whom it will
be produced.
What, How, And For Whom To
Produce Is The Function of Price
• What
• What is produced is determined by the
dollar votes that we cast for things and by
the dollar costs of producing those things
What, How, And For Whom To
Produce Is The Function of Price
• Whom
• For whom to produce is determined by the
price the market creates for resources that
people own-things like land, capital, and
our labor services.
What, How, And For Whom To
Produce Is The Function of Price
• How
• How goods are produced is determined as
business firms compare the relative prices
of resources-land, labor, capital, and
entrepreneurship
• Firms want to develop lowest-cost
combination of resources
Least-cost Combination
• The level of input use that produces a given
level of output at minimum cost.
Market Prices
• Market prices communicate crucially
important information:
• 1. To consumers about product availability.
• 2. To producers about consumer preferences
• 3. To individuals above the relative value of
particular kinds of knowledge and skills
Market Prices
• Prices ration resources and goods
• 1. When something is scarce, the quantity
of is insufficient to allow everyone to have
as much as they like.
• 2. There must be some method of
determining who gets how much of scarce
things
Market Prices
• Price acts as a message to the market
participants.
• The price system is the messenger.
• 1. The price system delivers a message
about changing market conditions.
• 2. The price system delivers does not
create the changing market conditions.
Extreme Economic Systems:
Market Capitalism and Command
Socialism
Market Capitalism In Theory
1. Private property rights exists, are
legal, and are upheld by the judicial
system
Market Capitalism In Theory
• 2. Prices are allowed to seek their own
level as determined by the forces of supply
and demand. In this sense, pure capitalism
is a price system.
Market Capitalism In Theory
• 3. Resources, including human labor, are
free to move in an out of industries and
geographic locations. The movement of
resources follows the lure of profits-higher
expected profits create an incentive for
more resource to go where those profits
might occur.
Market Capitalism In Theory
• 4. Risk takers are rewarded by higher
profits, but those whose risks turn out to be
bad business decisions suffer the
consequences directly in terms of reduced
wealth.
Market Capitalism In Theory
• 5. Decisions about what and how much
should be produced, how it should be
produced and for whom it should be
produced are left to the market. In a pure
market capitalist system, all decisions are
decentralized and made by individuals in a
process of spontaneous coordination
throughout the economy.
Laissez Faire
• An economic system in which the
government minimizes its activity within
the economy.
Three of Attributes of Market
Capitalism
• Prices
• Profits
• Private Property
Government Role in Capitalist
System
• Limited to certain goods
• Legal framework
Command Socialism in Theory
• Command Socialism. An economic system
in which there is virtually no private
property and the state owns virtually all the
factors of production. Decisions about
what and how much, by whom and for whom
are decided by command from a central
authority.
Command Socialism in Theory
• 1. Most of the major factors of productions
are owned by the state. Private property
rights are strictly limited to small tools that
an individual needs for an occupation.
Land, factories, and major machinery are
never privately owned.
• 2. Most prices are set by the state rather
than by the forces of supply and demand.
Command Socialism in Theory
• 3. The movement of resources, including
labor, is strictly controlled. Resources
typically move only when dictated by a
centralized planning authority.
• 4. Economic decisions about what and how
much, how, and for whom are all made by
the state through its central planning
agencies and other administrative units.
Command Socialism in Theory
• 5. Little individual risk taking is allowed;
rather, risk taking in the form of new
ventures is undertaken by the state. All
citizens benefit from successful risk
taking, and all citizens pay for
unsuccessful risk taking, but not directly
through immediate reduction in individual
income and wealth.
Command Socialism in Theory
• 6. Taxation is often used to redistribute
income.
Economic Planning
• Does economic planning occur in a
centralized command economy and not in a
decentralized market economy?
Incentive Structure
• The motivational rewards and costs that
individuals face in any given situation.
• Each economic system has its own
incentive structure.
Mixed Economies
• An economic system in which decisions
about how resources should be used are
make partly by the private sector and partly
by the government, or the public sector.
• What is the future of mixed economies?
China: Past, Present, and Future
Movement Toward The Market In
Russia
Changes In Other Parts Of The
World