Transcript What is economy?

Economy 102
What is economy?
What are the different
economic systems?
What is produced?
What is an Economic System?
• An economic system is what a country uses
to help sort out the sharing and control of
resources.
Economic System
• Manufacturing. Transformation
of materials into finished and
intermediate goods.
• Regulation. The way the
production system is controlled
and regulated. Mostly the role of
governments, but increasingly of
international multilateral
agreements.
• Circulation. Activities that link
the elements of the production
system. Includes transport and
communications.
• Distribution. Activities making
goods and services available to
the consumer, such as retailing.
• Traditional economy is an
economic system in which
resources are allocated by
inheritance, and which has a strong
social network and is based on
primitive methods and tools.
• It is strongly connected to
subsistence farming. Most
countries that have historically had
a traditional economy have
replaced it with a command
economy, market economy, or
mixed economy. However, it is still
found today in underdeveloped,
agricultural parts of South
America, Asia and Africa.
• Advantages
• Traditional economy
fosters a sense of
community, as it causes little
friction among members and
provides a sense of security.
• Therefore, there is a relatively
low unemployment rate and
low crime rate.
• A traditional economy allows
for a greater degree of
autonomy little or no
money is used.
• Disadvantages
• A traditional economy does not allow for much economic
growth and development as changes are very slow and little
social mobility.
• A traditional economy does not take advantage of technology
and there is relatively little promotion of intellectual and
scientific development.
• A traditional economy provides few incentives for entrepreneurs,
thus limiting choices for consumers and a lower standard of
living.
• Therefore it is not recommended for larger countries because
then it just won't work out-because the larger countries have
more people, instead of a smaller country with less people that
can be commanded.
• A traditional economy is where
people produce most of what they
need to survive.
• Hunting and gathering, farming,
and herding cattle are the bases of
traditional economy.
• People hunt for the food they eat
or raise it themselves.
• Often they make their own
clothing and tools.
• If they produce more food than
they need, they trade the surplus,
or extra food, for goods made by
others.
• In a command economy
the state or government
controls manufacturing and
formulates all decisions about
their use and about the
distribution of income.
• The planners decide what
should be produced and
direct enterprises to produce
those goods.
• The government controls
and regulates production,
distribution, and prices.
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A command economy serves collective
rather than individual needs: under such a
system, rewards, whether wages or perquisites,
are to be distributed according to the value
that the state ascribes to the service
performed.
A command economy eliminates the
individual profit motives as the driving force
of production and places it in the hands of the
state planners to determine what is the
appropriate production of different sets of
goods.
The government can control land, labor, and
capital to serve the economic objectives of the
state.
Consumer demand can be restrained in favor
of greater capital investment for economic
development in a desired pattern.
The states can begin building a heavy
industry at once in an underdeveloped
economy without waiting years for capital to
accumulate through the expansion of light
industry, and without reliance on external
financing.
• Inefficient resource distribution
surplus and shortage
• Cannot determine and prioritize
social goods
• Lack of incentive for innovation
• Lack of reward for hard work
• Infringement on individual
freedom
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Free-Market Economy or Capitalism, is
an economic system in which individuals,
rather than government, make the majority
of decisions regarding economic activities
and transactions.
Individuals are free to make economic
decisions concerning their employment,
how to use or accumulate capital, what
expenditures to make, and whether to use
their resources now or to save them for
later consumption.
The principles underlying free-market
economies are based on laissez-faire
(non-intervention by government)
economics.
In a free-market economy the
government's function is limited to
providing what are known as “public
goods” and performing a regulatory role in
certain situations.
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Government's role in a free-market
economy
Includes protecting private property,
enforcing contracts, and regulating
certain economic activities.
Governments generally regulate
“natural monopolies” such as utilities
or rail service (see Monopoly). These
industries require such a large
investment that it would not be
profitable to have more than one
provider.
Regulation is used in place of
competition to prevent these
monopolies from making excessive
profits.
Governments may also restrict
economic freedom for the sake of
protecting individual rights. Examples
include laws that restrict child labor,
prohibit toxic emissions, or forbid the
sale of unsafe goods.
• Free-market economies
encourage individual responsibility
for decisions.
• People in a free market economy
believe that economic freedom is
essential to political freedom.
• Many people believe that free
markets are more efficient in
economic terms.
• Free markets provide incentives
both to individuals to allocate
resources, such as labor and capital,
among the most productive uses,
and to firms to produce goods and
services that the public wants,
using the most efficient means of
production.
• A mixed economy is based on a mixture of state
and private ownership and control.
• Many countries have a mix of command and
market economies.
• There is a range of trade and industry freedoms
in these countries.
• Nigeria is an example of a mixed economy.
Human Capital
• Value of people’s work
• Skilled workers are valuable to businesses.
• Providing health care, education, and training to
a worker is an investment in human capital
Investment in Human Capital
• Important to human growth
• Maintaining machines on farms or in industry
are important.
• Need for fuel and regular repair
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Capital Goods
Goods used to produce other goods
Capital goods are machinery and factories
Buying something to help a business make
money is called investing in capital goods
• Things that hinder capital goods