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Economic Systems

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Economic Systems AS Economics Unit 1 – PowerPoint PPT presentation

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Title: Economic Systems


1
Economic Systems
  • AS Economics Unit 1

2
ECONOMIC SYSTEMS
  • BASIC ECONOMIC DECISIONS
  • No two economies are organized in exactly the
    same way, but all have to solve three fundamental
    problems

3
What should be produced in the economy?
  • What quantities of food, mobile phones or banking
    services should be produced by the economy?
  • How many trees need to be felled to meet the
    demand for pulp for newspapers and magazines?
  • Should we spend extra money on national defence
    or should more resources be devoted to health
    care and education?

4
How should production be organised?
  • Should a firm use labour or machinery to produce
    their goods?
  • How many workers should be employed?
  • Should production take place in London or
    Newcastle or in the UK or Malaysia?
  • Why has the Vaux Brewery closed down in
    Sunderland?
  • These are all examples of important production
    decisions.

5
For whom should production take place?
  • Should everybody be entitled to an identical
    share of production, or should some receive more
    than others?
  • There are large-scale inequalities in people's
    living standards.
  • Indeed the gap between rich and poor has widened
    considerably over the last twenty years.

6
TRADITIONAL OR SUBSISTENCE ECONOMIES
7
TRADITIONAL OR SUBSISTENCE ECONOMIES
  • There is little specialisation and trade within
    the economy and with other countries
  • The productivity of workers tends to be low
    leading to low incomes and a poor standard of
    living
  • People tend to live in family groups, and grow
    most of their own food, make their own houses,
    gather their own fuel and provide their own
    leisure activities i.e. to a great extent they
    are self-sufficient
  • Few goods and are marketed and command a price or
    value - there is little surplus production to
    export

8
Free market Economies
9
FREE MARKET ECONOMIES/ MARKET ECONOMIES/
CAPITALIST ECONOMIES
  • A free market economy is one where economic
    decisions are made through the free market
    mechanism.
  • The forces of market demand and supply, without
    any government intervention, determine how
    resources are allocated.
  • This is known as the working of the price
    mechanism.

10
THE INTERDEPENDENCE OF MARKETS - GOODS MARKET.
  • Demand for the good rises
  • This creates a shortage
  • This causes the price of the good to rise.
  • This eliminates the shortage by choking off some
    of the demand and encouraging firms to produce
    more.

11
THE INTERDEPENDENCE OF MARKETS - FACTOR MARKET
  • The increased supply of the good causes an
    increase in the demand for factors of production
    (inputs) used in making it.
  • This causes a shortage of those inputs
  • This causes their prices to rise.
  • This eliminates their shortage by choking off
    some of the demand and
  • encouraging the suppliers of inputs to supply
    more.

12
The price mechanism the effect of a rise in
demand
Goods market
? Sg
Shortage DggtSg
Until DgSg
D?
?
? Pg ?
? Dg
Factor market
? Si
Shortage DigtSi
Sg?
?
Di?
?
? Pi ?
? Di
13
Advantages of a free market economy
  • It regulates itself.
  • There is no need for costly and complex
    bureaucracies.
  • The economy can respond quickly to changing
    demand and supply.
  • Competition between firms keeps prices down and
    acts as incentive to become more efficient.
  • The more firms competing, the more responsive
    they will be to consumer wishes.
  • The more efficiently firms combine their factors
    of production, the more profit they will make.
  • The more efficiently workers work, the more
    secure their jobs will be and the higher their
    wages.
  • The more carefully consumers decide what to buy,
    the greater the value for money they will
    receive.
  • Therefore, people, in pursuing their own
    self-interest are helping to minimise the problem
    of scarcity.
  • Market economies have outperformed planned
    economies

14
Disadvantages of a Free Market Economy
  • What is produced is based on the vote of those
    with the ability to buy rather than need.
  • Tends to be less equitable
  • External costs and benefits from production or
    consumption can be ignored.
  • Demerit goods are produced with no restrictions.
  • An insufficient quantity of public goods and
    merit goods.
  • The poor only benefit if there is truth in the
    trickle down theory, in reality this doesnt
    happen sufficiently.
  • Erratic swings in the business cycle.

15
COMMAND ECONOMIES
16
COMMAND ECONOMIES
  • A command economy is one where all key economic
    decisions are made by the government (or state).
  • The government decides what to produce how it is
    to be produced and how it is to be allocated to
    consumers.
  • This involves a great deal of economy planning by
    the state.
  • By state planning, goods and services can be
    produced to satisfy the needs of all the citizens
    of a country, not just those who have the money
    to pay for goods.
  • Over the last decade, many former planned economy
    have attempted to bring market forces into their
    economy.

17
GUM - Moscow
18
Dom Knigi - Leningrad
19
Advantages of a Command Economy
  • Tries to be more equitable the gap is narrower
    between the rich and the poor
  • Less wastage.
  • What is produced can be linked in with the aims
    of the government
  • Resources can be used for essential items and not
    frivolous ones

20
Disadvantages of a Command Economy
  • Some are more equal than others
  • Tends to be slow
  • Tends to be bureaucratic
  • Wastage in unsold goods
  • Quality is not as important
  • Production methods less efficient due to lack of
    competition
  • Product orientated rather than market orientated

21
MIXED ECONOMIES
  • A mixed economy is a mixture of a pure
    free-enterprise market economy and a command
    economy.
  • Nearly every country in the world operates a
    mixed economy although the "mix" can change.
  • There is a private sector and a public sector in
    the economy
  • In recent years many command economies have
    become mixed economies. Examples include
    countries that were part of the former Soviet
    Union.

22
To become a mixed economy
  • The role of the market and the private sector of
    the economy must be increased by
  • Privatisation of state industries
  • De-regulation of markets promoting increased
    competition through the entry of new firms
  • A gradual ending of state subsidies
  • Encouraging foreign investment into the economy

23
Early 1990s
North Korea
China
UK
China Hong Kong

USA
Poland
Cuba
Totally planned
Totally free
USA
Poland
Cuba
China Hong Kong
North Korea
UK
China
Early 2000s
24
The problems of economic transition
  • A lack of understanding and experience of how
    market forces actually work
  • A removal of import controls
  • The absence of a legal framework
  • Hyperinflation
  • An increase in inequality and unemployment

25
The Success of Economic transition
  • Foreign direct investment. E.g. Volkswagen in
    Skoda in the Czech replublic
  • BMWs building a new plant in Hungary.

26
The Success of Economic transition
  • Privatisation of manufacturing industries.
  • Restructuring of key industries e.g. stock
    exchanges.
  • Financial incentives of the market system

27
Conclusion
  • No matter what the economic system, the
    fundamental economic problem of scarcity must be
    solved. Every economic system faces opportunity
    costs in making decisions.
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