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