Economic Systems

Session 1
Scarcity and Choices

• Every society has some system or mechanism that

transforms that society’s scarce resources into useful
goods and services.
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The economic problem
• Given scarce resources, how, exactly, do large, complex societies go
about answering the three basic economic questions?
The Mechanism of Choice

• Market Mechanism- market economies

• Intervention by government- command economic system or planned
economy
• Mix of both-Mixed Economies
 Economic Systems
• Economic systems are the basic arrangements made by societies to
solve the economic problem. They include:
• Command economies
• Laissez-faire economies or Market Economies
• Mixed systems

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Economic Systems

• In a command economy, a central

government either directly or indirectly
sets output targets, incomes, and
prices.
• https://en.wikipedia.org/wiki/Republic
s_of_the_Soviet_Union

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Discussion
• What decisions in your life are the result of economic freedom?
• Tell at least three examples of decisions that your government makes
for its citizens.
Economic Systems

• In a laissez-faire economy, individuals

and firms pursue their own self-
interests without any central direction
or regulation.
• The central institution of a laissez-faire
economy is the free-market system.
• A market is the institution through
which buyers and sellers interact and
engage in exchange.

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 Economic Systems
• Consumer sovereignty is the idea that consumers
ultimately dictate what will be produced (or not produced)
by choosing what to purchase (and what not to purchase).
• Free enterprise: under a free market system, individual
producers must figure out how to plan, organize, and
coordinate the production of products and services.
• In a laissez-faire economy, the distribution of output is
also determined in a decentralized way. The amount that
any one household gets depends on its income and
wealth.

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Decisions of Command Economy
Decisions in Market Economy
Decisions in Market Economy
 Cont.
• The basic coordinating mechanism in a free market system is
price. Price is the amount that a product sells for per unit. It
reflects what society is willing to pay.
• Capitalism is an economic system in which each individual in
his capacity as a consumer, producer, and resource owner is
engaged in economic activity with a large measure of
economic freedom.
• Individual economic actions conform to the existing legal and
institutional framework of the society which is governed by
the institution of private property, profit motive, freedom of
enterprise, and consumers’ sovereignty

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Mixed Systems , Markets, and Governments

Since markets are not perfect, governments

intervene and often play a major role in the
economy. Some of the goals of government are
to:
• Minimize market inefficiencies
• Provide public goods
• Redistribute income
• Stabilize the macroeconomy:
• Promote low levels of unemployment
• Promote low levels of inflation

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Socialism
Socialism is a populist economic and political system in which the means of
production operate under public political ownership, sometimes called
common ownership. Common ownership under socialism may take shape
through technocratic, oligarchic, totalitarian, democratic or even voluntary rule.
All legal production and distribution decisions are made by the ruling class.

Read more: Socialism Definition | Investopedia http://

www.investopedia.com/terms/s/socialism.asp#ixzz4MHUgLTYy
https://
cs.stanford.edu/people/eroberts/cs201/projects/communism-computing-china
/index.html
 
Germany
• The Germans proudly label their economy a "soziale Marktwirtschaft ," or "social
market economy," to show that the system as it has developed after World War II
has both a material and a social--or human--dimension. They stress the
importance of the term "market" because after the Nazi experience they wanted
an economy free of state intervention and domination. The only state role in the
new West German economy was to protect the competitive environment from
monopolistic or oligopolistic tendencies--including its own. The term "social" is
stressed because West Germans wanted an economy that would not only help
the wealthy but also care for the workers and others who might not prove able
to cope with the strenuous competitive demands of a market economy. The term
"social" was chosen rather than "socialist" to distinguish their system from those
in which the state claimed the right to direct the economy or to intervene in it.
• Source :http://countrystudies.us/germany/136.htm
China
• For more than 30 years, China's gross domestic product has increased by almost 10 percent
per year, which is a rate far above those of developed nations. Deng Xiaoping, its leader at the
time, is famous for his pragmatism. To him, building a thriving capitalist economy was key for
growth, and he invested heavily in the Chinese economy to make it the world's leading
manufacturing center.
• Unlike many countries in the West, many of China's businesses are owned by the
government, and the country has strong regulatory power over private businesses. This
control, which many view as overly restrictive, helps the country grow in a manner the
government views as most beneficial.
• China has not abandoned socialism or communism, and many elements of socialism are still
present. German philosopher Karl Marx, who wrote extensively on communism, stated that
all countries must go through a period of capitalist growth to build the infrastructure needed
for communism to flourish. Chinese officials view the country's embrace of capitalism as a
transitional period needed to create a communist economy.
Japan
• Japan has an industrialized global free market economy. A free market economy is a
competitive economic system in which businesses compete with each other for profit and
the prices of goods and services are based on supply and demand. Japan's economic system
is very similar to that of the United States
• Japan was one of the first Asian countries to industrialize in the late 19th century alongside
Western counterparts. In fact, Japan recruited thousands of Westerners to move to Japan to
help teach Japanese workers about Western technology as well as educate them in the
subjects of math and science. The success of this endeavor led to the elevation of education
in Japanese society as an essential tool to success. A high priority on education in Japan has
generated a highly skilled workforce. This workforce has catapulted Japan to the top of the
world in technological advances and development. The success of Japanese advances in
electronics helped boost Japan to the forefront of global economics. Japan is also a trade-
friendly country, which has helped it compensate for a lack of natural resources that are
usually necessary for countries to develop competitive economies.
Sweden
• Sweden’s economic competitiveness has been sustained by solid
institutional foundations for an open-market system. The judiciary,
independent and free of corruption, provides strong protection of
property rights and upholds the rule of law. The economy is open to
global trade and investment, and high levels of regulatory
transparency and efficiency encourage vibrant entrepreneurial
activity.