Economic system of society. Unit 2
1. UNIT 2. Economic Systems of society
2. Economic systems of society• Topics:
• 1. Definition and meaning (What is an economic
system). Types of economic systems.
• 2. Economics goals and types of economic systems.
• 3. The economic problem and economic systems.
• 4. Key-words and terms
3. Aims and objectives• Aims:
• 1) Introduce types of economies;
• 2) Introduce special vocabulary.
1) Show presentation;
2) Show vocabulary (key-words and terms;
3) Be ready for testing
4. References:• Alberto Bisin (2011) Introduction to economic
analysis, Dept. of Economics NYU
• William A. McEachern (2006) Economics: A
Contemporary Introduction, University of
• Carl Menger (2007) Principles of economics,
Ludwig von Mises Institute
• The economic problem and economic system
5. 1. What is an economic system?• An economic system is an organized way
in which a country allocates resources and
distributes goods and services across the
whole nation or a given geographic area. It
is includes the combination of several
institutions, entities, agencies, decisionmaking processes and patterns of
consumption that make up the economic
structure of a specific community. Hence it
is a type of social system.
entities in an economy interact. Defining
them today is much more complicated
than it used to be.
• Ancient systems were relatively simple –
trade was carried out using barter and
there were very few treaties and rules of
and services are produced, distributed and
at what price. There are three main types:
a market, planned and mixed economy.
• Scarcity refers to the limited supply of something
– Every country must deal with the problem of
scarcity since no country has everything that its
• Every country must develop an economic system to
determine how to use its limited resources to answer
the three basic economic questions:
– What goods/services will be produced?
– How will goods/services be produced?
– Who will consume the goods/services?
• The way a country answers these questions
determines its economic system
10. 2. Economic goals and Types of Economic Systems:Economic Systems
11. 2.1. Economic goalsSociety’s answer the three economic questions, and thus
determine the type of economic system they use, based on
their economic goals and societal values → it is impossible to
pursue all goals equally, therefore, in pursuing certain goals,
society’s will pay an opportunity cost in pursuing other goals
No matter the type of economic system a society employs, it must
answer the following three economic questions:
1. What goods and services should be produced?
→ What are we going to make?
2. How should these goods and services be produced?
→ How are we going to make it?
3. Who consumes these goods and services?
→ Who gets the stuff we make?
Economic freedom → freedom from government intervention in
the production and distribution of goods and services
Economic security and predictability → assurance that goods and
services and the ability to pay for them will be available and a
safety net (unemployment insurance, FDIC, social security, etc.)
will protect individuals in times of economic difficulty
Economic equity → fair distribution of wealth
Economic growth and innovation → innovation leads to
economic growth, and economic growth leads to a higher
standard of living
* Society’s can pursue many other goals such as stability and
environmental protection, but we will focus on the list above
13. Economic systems today are complex• In ancient societies, people only exchanged
what they had for what they wanted or needed.
Today, however, in monetary economies, the
setting is much more sophisticated.
• We currently live in a society where massive
corporations have a strong influence on how
business is done. Agreements and treaties are
negotiated and signed every day, and
governments have made many laws concerning
trade, which means we require a much more
comprehensive definition of what an economic
organized manner in which a particular government has
chosen to allocate its country’s goods and services.
Systems in today’s economies are about much more than
simple trade. They define our society’s values and its
Every economic system looks at three or four basic
• What to produce ?
• How to produce and how much ?
• Who receives production’s out-put ?
• How change is going to be effected and accommodated.
these three or four questions. The system sets the rules
of play for all the players in an economy, and defines how
they can interact with one another.
• The study of economic systems looks at how their various
components are interlinked, how information flows
between them, and their social relations, including the
structure of management and property rights.
• The analysis of economic systems used to focus on two
extremes – planned and market economies, and on the
differences between socialism and capitalism.
• Today the classification of economic systems has
expanded to include other models and topics that do not
conform to those traditional extremes. Globally, the
currently dominant form of economic organization is
based on varying versions of a market-oriented mixed
16. Economic SystemsEconomic Systems – method used by a society to
produce and distribute goods and services
Each type has its own solution to questions: what,
how much and for whom provide goods and
17. Types of Economic Systems:1. Traditional Economy
– relies on habit, custom, or
ritual to decide questions of
production and consumption
of goods and services
little room for innovation or
revolves around the family
18. Types of Economic Systems:2. Market Economy
– decisions on production and consumption of
goods and services are based on voluntary
choices are made by individuals
19. Types of Economic Systems:3. Mixed Economy
in which the
a limited role
20. Types of Economic Systems:4. Command Economy
– a central authority is in command of the
central government makes all the decisions
21. Comparing Mixed Economies• An economic system that permits the conduct of
business with minimal government intervention
is called free enterprise. The degree of
government involvement in the economy varies
Continuum of Mixed Economies
Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick
22. Countries Economic Systems:Traditional
23. 3 EconomicsTraditional
• WHAT goods and services should be produced?
• HOW should these goods and services be produced?
• FOR WHOM should these goods and services be
24. Traditional economies• The highest goals of people in a traditional
economy are economic stability and
security. Most want nothing more than to live as
they always have, following traditional ways of
life, in harmony with nature. For most traditional
societies, though, this goal is increasingly
difficult to attain. Traditional economies have
become shrinking outposts of the past
surrounded by the modern world. As modern
economies exert an ever-growing influence,
traditional societies are struggling to find a path
to economic survival.
• Which ones?
26. Inuit (North America)
27. Command economies• Rulers at the top of these early civilizations—
kings, pharaohs, emperors—commanded the
populace to devote economic resources to
building projects or military adventures. Many
thousands of people might be conscripted to
build a pyramid, defensive wall, irrigation canal,
temple, or road. In a preindustrial age, such
projects took vast quantities of human
labor. Often, many people would be drafted into
a ruler’s army and sent into battle in distant
with command economy?
29. North Korea
30. Market Economies: Decision Making by IndividualsMarket Economies: Decision
Making by Individuals
• The newest economic system to emerge in
human history is the market economy. A market
economy depends not on tradition or command
to coordinate its activities but on the decisions of
individual producers and consumers. Note that
when economists speak of “the market,” they are
referring to the economic system within which
buyers and sellers exchange goods and
services. This is distinct from an everyday
market, which is a place where people buy and
32. 3. The economic problem and economic systems
The economic problem emerges because our desire for goods and services
to consume is greater than our ability to produce those goods and services.
The demand for goods and services arises from human wants. There are
three types of human wants.
Biological wants are for the goods and services needed to sustain human
life. These are food, shelter, and clothing. These goods are often called
Cultural wants for are for goods and services beyond necessities in order to
maintain the socially accepted standard of living. The idea of a standard of
living will vary with time and place. An acceptable living standard for 1800
would not be acceptable in 2000. These goods and services are called
Demonstration wants are for goods and services beyond conveniences.
Thanks to modern telecommunications, we all know about the lifestyles of
the rich and famous, and would not mind it for ourselves. These goods and
services are called "luxuries". Note that economic development means that
the luxuries of yesterday become the conveniences of today!
Economists assume that human wants possess a critical characteristic that I
will state as a proposition.
We have never seen any human society enjoying want saturation,
including the United States today. Sadly, the developing nations of the
world often cannot even provide for life sustaining biological wants.
The supply of goods and services results from the production
process. In production, various inputs are brought together and
combined to create goods and services. These inputs are classified into
the three "factors of production".
Land is natural resources or our endowment from nature. The
payments for the use of land are called "rents" and "royalties".
Labor is all human effort, both physical and mental, used in production.
The payments for labor are "wages" and "salaries".
Capital is all goods used to produce other goods and services. Capital
is also called "producer durables". Capital has to be produced, and to
get more capital we must reduce our production of consumer goods.
The payments for capital are "interest" for debt (borrowed) capital and
"profits" for equity (owner supplied) capital.
The factors of production are versatile and may be combined in
different proportions to produce the same thing. The United States is
capital abundant and uses machinery intensively for farming. China is
labor abundant and uses people intensively for farming.
The factors of production possess a critical characteristic.
goods and services to consume will always exceed
the ability of that society to produce goods and
• This problem poses serious policy questions to all
nations, the advanced as well as the less developed. For
the less developed, it is often a cruel dilemma for their
economies are often hard pressed even to furnish the
biological necessities. "Poverty" in the Third World is not
the same as "poverty" in the United States.
35. Let us repeat1) Traditional Economy
• centers on families, clans, or tribes
– decisions are based on customs and beliefs
• Good of the group always comes before
Can you reckon some pluses and minuses of
Tradition economy ?
36. Tradition economy• Advantages and Disadvantages
– Advantages: little disagreement over goals,
• methods of production, distribution determined by
– Disadvantages: as result of resistance to
change, less productive
• do not use new methods; people not in jobs they
are best suited for
• low productivity results in low standard of living
37. Let us repeat• Command Economy….
Who can tell about this?
You can work together
38. Command Economy• (centrally planned economy) government
(or a king, a leader, a marshal) makes
– determines what to produce; how to produce;
who gets products
– determines who is employed, work hours, pay
• Wants of individual consumers rarely
• Government owns means of production:
resources and factories
39. Let us repeatMarket Economy (no interruption from
• driven by choices of consumers and
– consumers spend money, go into business,
sell their labor as they wish
– producers decide how to use their resources
to make the most money
• Consumers, producers benefit each other
when they act in self-interest
40. Let us repeatMixed economy
• has elements of traditional, command,
– most common type of economic system
• Traditional, command, market economies
adopt elements from others
• U.S. basically has market system
• European countries greater mix of market
and command elements
– France—government controls some
industries; provides social services
– Sweden—state owns part of all companies;
lifelong benefits, high taxes
– Namibia—traditional; state supports market,
42. NOTES:• 1. The Industrial Revolution began in England and France in the
1700s, and has now spread throughout the world. The Traditional
form of economic system cannot be used in an industrial society.
Capitalism, Fascism, Socialism, and Communism are all modern
(1800s and 1900s) attempts to develop an economic system for
an industrial society.
• 2. All industrial societies have extensive use of capital goods,
extensive division of labor, and have indirect exchange based
upon the use of money.
• 3. State ownership of resources under Socialism and Communism
reduces the choice of production techniques. The selected
techniques are usually labor intensive since these societies are
more concerned with full employment rather than growth.
and control of resources is very close to the
Traditional form of economic system.
• 5. In Pre-Industrial Europe (before 1500), the
Traditional form of economic system is called
Feudalism. During the Renaissance (1500 to 1700),
as Europe moved towards the first industrial society,
the transitional economic system is called
Mercantilism. Mercantilism combined features of
both modern Fascism and Socialism.
44. Key-words and terms• Centrally planned or command economy –an
economy where all economic decisions are taken by
the central authorities.
• Free-market economy – an economy where all
economic decisions are taken by individual
households and firms and with no government
• Mixed economy–an economy where all economic
decisions are taken partly by the government and
partly through the market.
45. Key-words and terms• Planning – establishment of objectives for man
and organization and determination of the best
ways to accomplish them.
• Nationalization – the process under which
private industries become state owned
• Tax – a charge, monetary as a rule, imposed by
authority upon persons or property for public
46. Key-words and terms• Subsidy –monetary grant or gift.
• Partnership –unincorporated business
owned and operated by two or more
persons under a voluntary legal