Transcript Economics for Today 2005

Economies
in Transition
• Key Concepts
• Summary
©2005 South-Western College Publishing
1
What will I learn
in this chapter?
You will learn the three basic
types of economies,
traditional, command and
market, then you will
examine the pros and cons
of the “isms”— capitalism,
socialism, and communism.
2
What is an
economic system?
The organization and
methods used to
determine what goods
and services are
produced, how they are
produced, and for whom
they are produced
3
What are the basic types
of economic systems?
• Traditional
• Command
• Market
4
What is a
traditional economy?
A system that answers
the What, How, and
For Whom questions
the way they always
have been answered
5
What is the benefit of a
traditional economy?
There is little friction
among members
because relatively little
is disputed
6
What are the
disadvantages of a
traditional economy?
Restricts individual initiative
Lack of advanced goods,
new technology, and growth
7
What is a
command economy?
A system that answers
the What, How, and
For Whom questions
by central authority
8
What is the structure of
a command economy?
It has a pyramid structure
9
The Command Economy Pyramid
Supreme
planning
agency
Specialized planning agencies
Producing units
Consuming units
10
What are the
strengths of a
command economy?
Economic change can
occur very quickly
Social welfare can be
enhanced
11
What are the
weaknesses of a
command economy?
Decision makers have
the power to be
absolutely wrong
Quality and variety of
goods suffer
12
Price per side mirror (rubles)
Central Planners Fixing Prices
$80
S
Shortage of 400
thousand side mirrors
$60
$40
$20
Price set by planners
E
D
200 400 600 800 1000
Quantity of side mirrors (thousands per day)
13
Shortage of
mirrors
Planners set the
price of mirrors
below equilibrium
14
What is a
market economy?
An economic system that
answers the What, How,
and For Whom
questions using prices
determined by the
interaction of the forces
of supply and demand
15
Who was Adam Smith?
The father of modern
economics who
believed that a free
market economy
acted like an
“invisible hand”
16
What is the
invisible hand?
A phrase that expresses
the belief that the best
interests of a society are
served when individual
consumers and
producers compete to
achieve their own
private interests
17
What is the advantage
of a market economy?
It provides a wide
variety of goods and
services that buyers
and sellers exchange
at the lowest prices
18
What are criticisms of
a market economy?
• Lack of competition
• Externalities
• Lack of public goods
• Income inequality
19
What is a
mixed economy?
An economic system that
answers the What, How,
and For Whom questions
through a mixture of
traditional, command, and
market systems
20
What is capitalism?
An economic system
characterized by
private ownership of
resources and markets
21
What is
consumer sovereignty?
The freedom of
consumers to cast their
dollar votes to buy, or
not to buy, at prices
determined in
competitive markets
22
What is communism?
A stateless, classless
economic system in
which all the factors of
production are owned
by the workers and
people share in
production according to
their needs
23
Who was Karl Marx?
His criticism of
capitalism advanced
communism
24
What is socialism?
An economic system
characterized by
government ownership of
resources and centralized
decision making
25
What are the
characteristics
of socialism?
Public ownership
Centralization
26
What are the strengths
of socialism?
• An equitable
distribution of income
• Rapid growth is
possible
• No unemployment
27
What are the
weaknesses of
socialism?
Inefficiencies occur
Absence of entrepreneurship
stifles growth
28
A Classification of Economic Systems
China, Russia
Pure
socialism
Cuba, N.
Korea
U.S., Canada,
W Europe, Japan
Pure
capitalism
France, Mexico,
Latin
Sweden,
America
Israel
Hong Kong
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Key Concepts
30
•
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•
•
•
•
•
•
•
•
•
What is an economic system?
What are the basic types of economic systems?
What is a traditional economy?
What is a command economy?
What is a market economy?
Who was Adam Smith?
What is the invisible hand?
What is a mixed economy?
What is capitalism?
What is communism?
Who was Karl Marx?
What is socialism?
31
Summary
32
An economic system is the set of
established procedures by which a
society answers the What, How and
For Whom to produce question.
33
Three basic types of economic
systems are the traditional,
command, and market systems.
34
The traditional system is based on
decisions made according to
custom, and the command system
answers the three economic
questions through some powerful
central authority.
35
In contrast, the market system uses
the impersonal mechanism of the
interaction of buyers and sellers
through markets to answer the What,
How, and For Whom questions.
36
The Command Economy Pyramid
Supreme
planning
agency
Specialized planning agencies
Producing units
Consuming units
37
Capitalism is an economic
system in which the factors of
production are privately owned
and economic choices are made
by consumers and firms in
markets. As prescribed by Adam
Smith, there is an extremely
limited role for government, and
self-interest is the driving force,
held in check, or regulated, by
competition.
38
Consumer sovereignty is the
determination by consumers of
the types and quantities of
products that are produced in an
economy.
39
Socialism is an economic system in
which the government owns the
factors of production. The central
authorities make the myriad of
society’s economic decisions
according to a national plan. The
collective good, or public interest,
is the intended guiding force
behind the central planners’
decisions.
40
Communism is an economic
system envisioned by Karl Marx to
be an ideal society in which the
workers own all the factors of
production. Marx believed that
workers who worked hard would
be public spirited and would
voluntarily redistribute income to
those who are less productive.
Such a communist nation
described by Marx does not exist.
41
END
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