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Week 2

The document discusses different economic systems, including command systems (communism and socialism) and market systems (capitalism), highlighting their characteristics, advantages, and challenges. It outlines the fundamental questions each system addresses regarding production, consumption, and adaptation to change. Additionally, it mentions mixed systems that combine elements of both, as well as the emergence of economies transitioning from low income to developed status, reliant on market characteristics and government regulation.

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melindier2006
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10 views3 pages

Week 2

The document discusses different economic systems, including command systems (communism and socialism) and market systems (capitalism), highlighting their characteristics, advantages, and challenges. It outlines the fundamental questions each system addresses regarding production, consumption, and adaptation to change. Additionally, it mentions mixed systems that combine elements of both, as well as the emergence of economies transitioning from low income to developed status, reliant on market characteristics and government regulation.

Uploaded by

melindier2006
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Economic Systems

 Ownership of factors of production


 Method used to motivate/coordinate/direct Economic activity

Different Economic Systems


Command System (Communism)(Socialism)
 Public ownership of resources
 Economic decisions Made through central economic planning
 Suppose to benefit society
 Every one is equal
 Example: USSR, Cuba, China, Vietnam,

Demise of Command System


Coordination Problem
 Central planners coordinate millions of individuals (Consumers, Resources,
Supplier, Business)
 Expansion of Economics
 Lack of success indicator
 Difficult assign quantitative target production without unintendedly
producing distortions output
Incentive Problem
 Production targets set by Government
 Little incentive from workers/ management to adjust
 Little incentive to innovate
 Often increase in quality of live comes with political office (All animals are
equal exempt some are more equal than others)
Block trade with other countries

Market System (Capitalism)


 Laissez-faire capitalism
 Private ownership of resources
 Decentralized decision making
 Participants pursue own self interest
 Market determine what products will be produced for society and prices
 Goods/ Services produced by whoever
 Government limited to protecting private property rights
 3 Major outcomes
o Efficiency (Best use of resources)
o Incentives (Economic reward change economic decisions)
o Freedom (Freedom enterprise & choice)

5 Fundamental questions
What goods & services will be produced
 Profit Based
 Consumer Sovereignty
 “Rand Votes”
 Profit = Total Revenue – Total Cost
How will the goods & services be produced
 Combinations Minimize cost
 Right mix of labour, land, capital, entrepreneurship
 Most efficient production technique
Who will get/ consume the goods & services
 Ability/ Willingness to pay market price
 Market price depends on cost of production/ resource price
How will the system accommodate change
 Dynamic
 Change in profits & price
Appropriate response
How will the system promote change
 Technological advancement
New and improved methods to lower cost
Creative Destruction
 Capital accumulation
Entrepreneurs/ Business firms

Mixed System
 Falls in middle
 Heavy reliance on private incentive/ enterprise
 Government protects property rights
 Government involved in: Production, Redistribution of income, Government
regulation
 Private Property
Individuals own land capital
 Freedom of choice
Free to use resources and make own choices
 Self-interest
Free to achieve their own end
 Market and Price
Market brings buyers and sellers
Prices provide guidance
 Competition
Buyers/ Sellers act independently
 Technology and Kapital goods
Motivate capital good use and technological progress
 Specialization
Efficient production
 Geographical Specialization/
US geography for greater production
 Division of labour
Specialization of labour encourage more production
 Use of money
Make trade easier
 Active but limited Government
Systems efficient and dynamic

Emerging Economies
 Progressing from low income to developed economies
o Underpinned by market system characteristics
o Dependant on Government regulation
 Depended on other economies (Other countries)
 Investment in these nations are more volatile

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