Systems of Allocation

What is an economy?

An economy is the large set of inter-related productionand consumption activities that aid in determininghow scarce resources are allocated. In an economy,the production and consumption of goods and servicesare used to fulfil the needs of those living andoperating within it.

SCARCITY

The difference between wants and needs and available resources.

In economics, the term refers primarily to the “allocationof resources,” the process by which economicresources get allotted (apportioned, assigned) to theirparticular uses for directly or indirectly satisfying humanwants. The allocation process in a particular society'seconomy is the process by which the three fundamentaleconomic questions get answered in that society.

Economic Systems

• Def. The method used by a society to produce and distribute goods and services.

• Or, How the government tells us what we can get and how to get it!

Economic system provides a society with a frameworkthrough which it can maximize the use of limitedresources for the satisfaction of economic wants.

It ensures efficient production and distribution of goods and services to sustain human needs over time.

All Economic Systems Must Consider the

Following Questions:

1. What goods and services to produce?

2. How will they produce them?

3. Who will get them?

4. How much will they produce now, and how much later?

• Each economic system answers these questions in a DIFFERENT WAY.

TYPES OF ECONOMIC SYSTEMS

Economic Systems

TRADITIONAL ECONOMIC SYSTEM

5 TRAITS OF A

TRADITIONAL ECONOMY

COMMAND ECONOMIC SYSTEM

An economy in which the government has the power over the financial

management of the country

COMMAND ECONOMIC SYSTEM

COMMAND

“to give orders”

1. The government is in control of the pricing of goods and services.

2. The government makes all decisions for finances in the country.

3. Since hourly rate of pay is regulated, also tending to be just enough to survive, people

will tend to try and break the rules.

4. The state has absolute power over all resources.

5. The command economy has state-owned entities as well as privately-owned entities that are

controlled by the state.

6. People in power, such as politicians, give orders to buyers, sellers, and investors.

ADVANTAGES

1. Low unemployment rates due to the regulation of jobs by the government.

2. Everyone has access to health care services and necessary services needed to live, and usually the fee is either low or free.

3. Decisions are made quickly by state or government officials.

EXAMPLES:

NORTH KOREA

•North Korea: After World War II, President Kim Il-sung created theworld's most centrally-planned economy. It created food shortages,malnutrition, and several bouts of mass starvation. Most stateresources go into building up the military.

IMPORTANT: In 2018, command economies likeChina, Russia, and Iran have shifted toward moreeconomic freedom, while North Korea and Cubaremain economically restrained.

What Are the Advantages of a Command Economy?

1. Operations are consistent within a command economy.

2. It creates a flexible industrial sector.

3. The exact demands of a society can be met.

4. Any resource can work with any other resource.

5. It offers socioeconomic equality for much of the population.

6. Acute demands can be quickly met.

What Are the Disadvantages of a Command Economy?

1. It is a governmental structure which reduces personal freedoms.

2. It limits innovation.

3. It encourages illegal activities.

4. It eliminates the competition.

5. It reduces communication.

6. It reduces exports.

7. It creates incentives that people don’t see as an incentive.

MARKET ECONOMIC SYSTEM

• The market economic system started in England.

“The key to progress is allowing individuals to

pursue their self-interest and to satisfy themselves

without government interference as much as

possible.”

Advantages of a Market Economy

1. There is limited government intervention in a marketeconomy. The government as discussed earlier is only concerned with

protecting consumers and other market participants and ensuring nationalsecurity. Limited government intervention ensures a competitiveenvironment. The high degree of competition ensures business efficiency inthe market where producers try to produce at the lowest cost tomaximize profits.

2.Consumers need money to buy goods and services. In a

command economy, factors like wages, income, etc. are determined by acentral authority, therefore it can also be said that there is a lack of motivationto work more in order to earn more. However, in a market economy, theworkers have the motivation to work more in order to earn more. Thismotivation to work increases the output and productivity in an economy.

Advantages of a Market Economy

3. Economic agents work for their self-interest. So, inorder to maximize their profits, individuals andbusinesses look for new products or technologies togain a competitive edge. Note that there is no suchmotivation in a command economy.

4. The prevalence of competition in the market alsoensures that businesses are producing better qualitygoods to attract more consumers and increase sales toearn more profits.

Disadvantages of a Market Economy

1. Limited government intervention may lead toenvironmental damage. Most environmental-friendly production techniques involve major costs,businesses tend to avoid investing in them. So this lack ofinvestment in environmentally friendly practices damagesthe environment

2. Wealth generates further wealth as return oncapital is greater than the economic growth. Such growthcan lead to income and wealth disparity in the economy.

3. Health and safety measures are costly, and abusiness that is purely profit-driven, will not adoptthese measures to increase their profits. This oftenleads to poor working conditions for labor used inproducing these goods and services.

4.Production and prices are determined bymarket forces and so businesses only producethose products that can maximize their profits. This islikely to create a situation where the businesses donot produce those goods which are less profitableeven though they are essential for society.

POLITICAL-ECONOMIC THEORIES IN MODERN ERA

- focuses on the interrelationships

among individuals, governments, and public policy.

CAPITALISM

CAPITALISM- an economic and political system in which a country's trade and industry are

controlled by private owners for profit, rather than by the state.

- A society based on the privateownership of resources andmeans of production, which areconcentrated in the hands ofthe capitalists.

Capitalists = Business owners

“The market is always right.”

Free enterprise, or the free market, refers to

an economy where the market determines prices,

products, and services rather than the government.

Creates intense competition

among businesses

Production, distribution, and

consumptionMarket Signals

Money votes that consumers cast when they buy goods and services in the market

TAKE NOTE: Businesses will produce only the commodities consumers buy and sell more of them in markets where the demand for them is high.

Aims for the highest profit

Outdoing their competitors

Use the most efficient means of production

Maximum profit

CAPITALISTS

• Places enormous power in the hands ofconsumers.

• Businesses who wish to take advantage ofthe consumers do not have a place incapitalism.

CAPITALISM

❖Envisions utopia - a perfect society that harnesses thefull potentials of the people.

Charles Fornier

2 Main Forms of Socialism

Reform Socialism

- calls for the gradualtransformation of the

economy from capitalismto a system of worker orState ownership of themeans of production

Revolutionary Socialism

- predicts a violent overthrow of the capitalist system: the class struggle

between the proletariat and capitalists would end in a

revolution with former emerging victorious

COMMUNISM

KARL MARX FRIEDRICH ENGELS

MAIN PROPONENTS

FASCISM

➢Major political-economic systym in the early and mid-1900s➢Countries that once have this

economic system: ITALY, JAPAN,AFRICA, and ARGENTINA➢Hitler’s Germany called it

NATIONAL SOCIALISM➢FASCES = a symbol of authority in

Ancient Rome

Benito Mussolini – the first leader to use the term fascism to describe his government in 1920s

FASCISM• Establishes an authoritarian

government• Deprives people of their liberties• Forges political alliance with the

capitalists

• Adolf Hitler used this strategy to rearm Germany after World War I despite the restrictions imposed by the Treaty of Versailles.