Transcript Command Economies

Economic Systems
SSEF4a – Compare command, market, and mixed
economic systems with regard to private
ownership, profit motive, consumer sovereignty,
competition, and government regulation
1
Scarcity Means There Is Not Enough For
Everyone
Government must step in to help allocate
(distribute) resources
2
Scarcity Bus Ride
Scenario:
A group of 40 college students get on a bus to go
to a dance 30 miles away.
Shortly after leaving, the bus finds that it is too
heavy to go over a large hill
10 students need to get off the bus
You and your partner need to find 5 different
ways to decide who should get off the bus.
1.
2.
3.
4.
Are any of the solutions fair?
How are resources allocated in communism?
How are resources allocated in capitalism?
What role do prices play in capitalism?
3
Every society must answer three questions:
The Three Economic Questions
1. What goods and services should be
produced?
2. How should these goods and services be
produced?
3. Who consumes these goods and services?
The way these questions are answered
determines the economic system
An economic system is the method used by a
society to produce and distribute goods and
services.
4
Types of Economics Systems
• Economics Systems
1. Command
2. Market
3. Mixed-Market
Command Economies
(aka Communism)
6
Command Economies
In a command economy (communism) the
government…
1. owns all the resources.
2. answers the three economic questions
Examples:
Cuba, North Korea, former Soviet Union, and China?
Why do command economies face problems
of poor-quality goods, shortages, and
unhappy citizens?
NO PROFIT MEANS NO INCENTIVE TO
WORK HARDER!!
7
Irrational Soviet Production
Soviet companies were not guided by prices or profit. Gov’t officials
determined output quotas based on quantitative measurements.
Businesses were paid based on meeting these quotas.
1. Why did a business make desk lamps that were filled with lead
that were almost too heavy to carry?
Production quota based on weight
2. Why did light bulb producers only make tiny night light size
bulbs? Production quota based number of bulbs produced
3. Why did oil companies drill many shallow holes when they knew
that oil deposits are usually found in deep holes that require
slower drilling? Production quota based number of feet drilled
4. Why did a construction superintendent order his workers to
remove bathtubs from the first floor and install them in the
third floor while he slowly lead inspectors through apartment
building. Quota on # of apartments complete at inspection
5. Why did black market vendors sell burned out light bulbs?
Business got resources before the public so workers would steal good8
light bulbs from work and replace them with burnt out bulbs
Advantages and Disadvantages
What is GOOD about
command economies?
1. Low unemploymenteveryone has a job
2. Great Job Securitythe government
doesn’t go out of
business
3. Equal incomes means
no extremely poor
people
4. Free Health Care
What is BAD about
command economies?
1. No incentive to work
harder
2. No incentive to
innovate or come up
with good ideas
3. No Competition keeps
quality of goods poor.
4. Corrupt leaders
5. Few individual
freedoms (consumer
sovereignty/choice)
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Market System
(aka Capitalism)
10
Characteristics of a Market
Economy
1. Little government involvement in the economy.
(Laissez Faire = Let it be)
2. Individuals OWN resources and answer the
three economic questions.
3. The opportunity to make PROFIT gives people
INCENTIVE to produce quality items
efficiently.
4. Wide variety of goods available to consumers.
5. Competition and Self-Interest work together to
regulate the economy (keep prices down and
quality up).
Reword for Communism
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Example of Market Economy
Example of how the free market regulates itself:
If consumers want computers and only one
company is making them…
•Other businesses have the INCENTIVE to start
making computers to earn PROFIT.
•This leads to more COMPETITION….
•Which means lower prices, better quality, and
more product variety.
•We produce the goods and services that society
wants because “resources follow profits”.
The End Result: Most efficient production of the
goods that consumers want, produced at the lowest
prices and the highest quality.
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Example of Communism
Example of why communism failed:
If consumers want computers and only one
company is making them…
•Other businesses CANNOT start making
computers.
•There is NO COMPETITION….
•Which means higher prices, lower quality, and
less product variety.
•More computers will not be made until the
government decides to create a new factory.
The End Result: There is a shortage of goods that
consumers want, produced at the highest prices
and the lowest quality.
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The Invisible Hand
The concept that society’s goals will be met as
individuals seek their own self-interest.
Example: Society wants fuel efficient cars…
•Profit seeking producers will make more.
•Competition between firms results in low
prices, high quality, and greater efficiency.
•The government doesn’t need to get involved
since the needs of society are automatically
met.
Competition and self-interest act as an invisible
hand that regulates the free market.
14
Attacks Against Capitalism
15
Attacks Against Capitalism
1. Companies are greedy and do anything to screw over
consumers!
• Companies have an incentive to satisfy the needs of
consumers. If they don’t they will go out of business.
2. Capitalism causes companies to outsource US jobs
overseas. America suffers because companies want more
profit!
• How many of you lost your job to outsourcing?
• How many of you benefit in the form of lower prices?
3. Capitalism only helps the rich. US companies enslave and
exploit third-world workers in sweatshops!
• Sweatshop workers are not forced labor. They make the
decision to work there voluntarily. Why?
• Although the working conditions are far below US
standards, working in a sweatshop is better that the
alternative
•
Sweatshop wages in Vietnam, Honduras, and Nicaragua
are more than double the country’s average wage.
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Sweatshops
"My concern is not that there are too many sweatshops, but
that there are too few." -Jeffrey Sachs, Harvard University
Sweatshops Then
Sweatshops Now
Question: Who is to blame for
these people being so poor?
Answer: Low productivity.
If a country doesn’t produce very
much, it can’t afford to pay it’s
workers very much.
Why do these countries have
such low productivity?
Corrupt governments,
inadequate physical capital and
infrastructure, and
underdeveloped human capital.
What does foreign investment
bring to poor countries?
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Productivity Creates Wealth
Less Developed
Countries
Developed Countries
18
Mixed-Market System
19
Mixed Economy
• A mixed economy has elements of both market
and command economies
• Individual buyers and sellers often have the
right to decide how scarce resources are
allocated
• The government plays a role when needed
Market
system
Government
Mixedmarket
Economy
Resolving Market Failures
A market failure is a situation where markets fail to allocate
resources efficiently.
Command
Mixed
Market
• No market
failures
• No markets
• The
government
regulates
• Buyers and
sellers
• Survival of
the fittest
Connection to the PPC
CURRENT
CURVE
FUTURE
CURVE
Free Markets in the
Long Run
Capital Goods
Capital Goods
Communism in the
Long Run
FUTURE
CURVE
CURRENT
CURVE
Consumer goods
Cuba
Consumer goods
Costa Rica
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The difference between North and South Korea at night.
North Korea's GDP is $40 Billion
South Korea's GDP is $1.3 Trillion (32 times greater).
Activity:
• Create a flyer for both a COMMAND
Economy AND a MARKET Economy
• Explain each system clearly
• Tell me the advantages of each (at least 3)
• Tell me the disadvantages of each (3 again)
• Must be neat, organized, and wall worthy 
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Social Goals of Economic
Systems
Economic Freedom
• The right to choose your own occupation,
employer, and use of your money.
• Business owners have the right to produce
what they want and how much they want.
• Measurement: Corporate profits, GNP,
GDP, and Unemployment
Economic Equity
• Equity mean fairness
– Illegal to discriminate based on age, race,
sex, or disbility
– False Advertising, unfair pricing, and
dangerous products prohibited
• Measurement: Unemployment, # of
discrimination cases, minimum wage
Economic Security
• Protection from layoffs and illness
• Measurement: Welfare total recipients,
social security expenditures, and
unemployment rate
Full Employment
• If people cannot work they cannot support
their family. Society is hurt.
• Unemployment reduces efficiency
• Unemployed people must rely on others for
support (family, friends, gov’t, etc.)
• Measurement: Unemployment rate
Price Stability
• Inflation is a rise in the general level of
prices
• Inflation reduces every person’s buying
power
• Inflation is especially difficult for people on
fixed incomes (those that do not rise as
prices rise)
• Inflation hurts savers
• Measurement: Consumer Price Index (CPI)
Economic Growth
• Necessary to satisfy the needs and wants of a
growing population
• Do you want your children to live better than
you? Do you want to improve the quality of
medical care? Transportation? (etc.)
– To do this requires economics growth.
• Measurement: GNP, Corporate profits, Dow
Jones Industrial Average
Economic Goals by System
Goal
Economic Freedom
Economic Equity
Economic Security
Full Employment
Price Stability
Economic Growth
Command
Market/MixedMarket
Economic Goals by System
Goal
Economic Freedom
Equity Efficiency
Economic Security
Full Employment
Price Stability
Economic Growth
Command
Market/MixedMarket
√
Economic Goals by System
Goal
Command
√
Economic Freedom
Economic Equity
Economic Security
Full Employment
Price Stability
Economic Growth
Market/MixedMarket
√
Economic Goals by System
Goal
Command
√
Economic Freedom
Economic Equity
Economic Security
Full Employment
Price Stability
Economic Growth
Market/MixedMarket
√
√
Economic Goals by System
Goal
Command
√
Economic Freedom
Economic Equity
Economic Security
Full Employment
Price Stability
Economic Growth
Market/MixedMarket
√
√
√
Economic Goals by System
Goal
Command
√
Economic Freedom
Economic Equity
Economic Security
Full Employment
Price Stability
Economic Growth
Market/MixedMarket
√
√
√
√
Economic Goals by System
Goal
Command
√
Economic Freedom
Economic Equity
Economic Security
Full Employment
Price Stability
Economic Growth
Market/MixedMarket
√
√
√
√
√