Transcript What is to be produced?

Economics 120
Types of Economies
Three Key Questions
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What is to be produced?
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How is it going to be produced?
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Who gets what is produced?
Four Types of Economic Systems
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A traditional economy
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A command, or planned, economy
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A market or free market economy
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A mixed economy
Traditional Economy
Three key questions are answered by
“tradition” or past practice
 Produce the same goods, the same ways
and in the same quantities as in the past
 Still seen in a lot of underdeveloped
countries
 Skills are passed along from generation to
generation
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Traditional Economy
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Pros
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Stability and security
for population
All members know their
economic roles
Produces what best
ensures its survival
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Cons
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No innovation (resist
change)
Unable to adapt to the
world around it
Improvement in
economic life is limited
Command Economy
Answers the 3 questions with the use of a
central authority.
 Central authority owns the natural and
capital resources and decides how they
are to be used, what will be produced and
how they will be distributed.
 Closely associated with the so-called
communist regimes in Russia and Eastern
Europe
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Command Economy
Factories, farms and so on were given
directions about what they should be
producing
 Wage differentials were minimal - whether
you were a highly qualified university
professor or a street cleaner, wages only
varied by a small amount
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Command Economy
Former USSR had no unemployment, no
inflation and no homeless people. Anyone
who wanted a job had could have one and
the State provided housing.
 Expectation that each person was not
working for their own benefit but for the
good of the state.
 Still exists in (to some extent) some
countries, such as Cuba and some
countries in Africa, North Korea
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Command Economy
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Pros
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Central Planning
Resources can be
focused consistently
based on gov’ts
objectives
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Cons
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People may not agree
with the objectives set
by the government
No freedom to move
from job to job
May be forced to take a
certain career path
Market Economy
Pure market economies rarely exist but in
theory
 Answers the three questions that form the
economic problem through a market
system (supply and demand)
 Natural and capital resources are privately
owned.
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Market Economy
Price has a central role. It acts as a signal
to both consumers and producers.
 If prices are falling then this suggests
demand is also falling.
 USA is close to being a market economy.
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Market Economy
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Pros
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Goods and services
produced are those that
consumers want
Workers free to move
from job to job and
negotiate terms of
employment
Profit
Competition
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Cons
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Consumer decisions
about what is to be
produced may be
unwise (alcohol and
tobacco vs schools and
hospitals)
Inequalities of wealth
Goods not necessarily
distributed fairly
No mechanism for
providing public goods
and services (nat’l
defense)
Market Economy – “Invisible Hand”
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The theory of the Invisible Hand states
that if each consumer is allowed to choose
freely what to buy and each producer is
allowed to choose freely what to sell and
how to produce it, the market will settle
on a product distribution and prices that
are beneficial to all the individual
members of a community, and hence to
the community as a whole.
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Adam Smith
Mixed Economy
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The vast majority of countries around the
world have some form of mixed economy
where some resources are allocated
through the price or market mechanism
and others are allocated by the state.
Mixed Economy
Canada is a typical example of a mixed
economy.
 Government role – influence economic
activities through taxes, subsidies, laws
and regulations.
 We also have a private sector where goods
and services are allocated on the basis of
the market mechanism.
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Mixed Economy – Farm Example
Harvest time – traditional
 Roads, public school, minimum wage –
command
 Private property rights, competitive
market to sell goods - market
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