Basic Economic Questions: What to produce? How to produce? For whom to produce?
Economic System The organization
of an economy, which represents a country’s distinct set of social customs, political institutions, and economic practices
1.4 Economic Systems
Exactly what it sounds like: everything is based on traditions i.e. what your dad did you will do
What to produce? Same as always
How to produce? Same methods
For whom to produce? Same customers
Traditional Economy
Positives Very stable and predictable
Negatives Poor at adaption Limited Choices
Very Rare Attacked by increased expectations
Traditional Economy Cont’d
Inuit of Northern Canada For thousands of years, Inuit parents have been teaching
their children the survival skills that they need to survive in the severe climate of the Arctic Circle
The children are taught how to fish, hunt, and make traditional tools
If a walrus or bear is caught, hunters divide it evenly into as many pieces as there are heads of families in the hunting party
The hunter most responsible for the successful hunt has first choice, the second-most helpful hunter chooses next, and so on
Example of a Traditional Economy
Everything is based on consumer sovereignty You decide
What to produce? Whatever consumers want
How to produce? Cheapest and most efficient
way possible For whom to produce?
Whoever will buy
Market Economy
Positives Innovation Flexibility Efficiency
Negatives If it isn’t
profitable, don’t do it
Cut-throat Intangibles Human Costs
Market Economy Cont’d
Resource Markets
Product Markets
Resource Market Markets in which
economic resources are traded
Product Markets Markets in which
consumer products are traded
Market Economy Cont’d
Resource Markets
Product Markets
Opposite to a Market Economy Command Economy
An economic system based on public ownership and central planning
Rather than production being based on consumer wants, command economies rely on planners to decide what should be produced, how production should be carried out, and how the output should be distributed
Command (Planned) Economy
Positives Easy on the consumer Direction of resources to who you feel needs them
Negatives Hard to predict the future unknowns Lack of freedom
Command Economy Cont’d
Most countries fall between the extremes of traditional, market and command economies
Modern Mixed Economy An economic system that combines aspects of a market
economy and a command economy Production decisions are made in both private market and
by government Traditional Mixed Economies
Economic systems in which a traditional sector co-exists with modern sectors
Mixed Economies
https://www.youtube.com/watch?v=1XYXD3YsBxU
Mixed Economies – USA & China
Circular Flows The circulation of money and the circulation of
consumer products and economic resources in the economy
Consumer Sovereignty The effect of consumer needs and wants on production
decisions Invisible Hand
The tendency for competitive markets to turn self-interested behaviour into socially beneficial activity
Or, stated a different way: “[t]he invisible hand is essentially a natural phenomenon
that guides free markets and capitalism through competition for scarce resources.”
Definitions
Private Sector The part of an economy in which private markets
dominate Public Sector
The part of an economy in which governments dominate
Traditional Sector The part of an economy in which
custom and traditional production techniques dominate
Private, Public & Traditional
Income Equity Achieved when a country’s total output is distributed
fairly “What is fair”? Is it fair that the salary of a bank executive
is hundreds of times higher than the year’s wages of a part-time gardener?
Since value judgment comes into play, satisfying income equity is controversial
Price Stability Government tries to minimize the country’s rate of
inflation (rise in general level of prices) Purchasing power falls Peoples incomes don’t necessarily increase
Economic Goals
Full Employment Government wants to minimize involuntary unemployment Labour Force: those working and those involuntarily
unemployed and actively seeking employment Unemployment Rate: the percentage of a labour force that
is involuntarily unemployed Viable Balance of Payments
Due to Canada’s dependence on foreign markets, it is important that Canadian imports and exports roughly balance one another
Economic Growth Outward shift in PPF curve Helps raise average standard of living in a country Good for emerging economies trying to eradicate extreme
poverty
Economic Goals
Economic Efficiency Getting the highest benefit from an economy’s scarce
resources Scare economic resources need to be employed in a way that
maximizes utility Environmental Sustainability
While economic activity is carried out, the physical environment should also be sustained without significant harm Significant changes in the
climate recently have been attributed to irreversible damage to the climate via economic activity
Economic Goals
Complementary Goals Reaching one economic goal makes the other one
easier e.g. Full Employment and Economic Growth
Conflicting Goals Attaining one goal makes another
goal more difficult to achieve e.g. Price Stability and Full
Employment These issues are resolved by
making priorities, where one goal is achieved at the cost of another
Economic Goals