How do we allocate the available resources?

1. How do we allocate the available resources? 1 2 3 4 5 6 7 8 9

2. Which of these allocation schemes are fair? 1 2 3 4 5 6 7 8 9

3. Economist’s have a favourite solution to most economic problems Auction Write your name on a slip of paper and the MAXIMUM price that you would be willing to pay. Don’t let anyone see your price!

4. Economic Systems

5. Economic Systems • An economic system describes the methods used by societies to produce and distribute goods & services • The economic system a society employs reflects that societies goals and value

6. The Three Questions • What goods & services to produce? • allocation of resources • guns vs. butter • How to produce them? • human labor vs. machinery • renewable vs. carbon based energy sources • Who gets to consume them? • distribution based on wealth vs. need • political vs. financial Q: WHY DOES EVERY ECONOMIC SYSTEMS NEED TO ADDRESS THESE QUESTIONS?

7. Scarcity – Resources vs. Wants Unlimited Needs & Wants Limited Resources SCARCITY CHOICES (SOCIETY) WHAT to Produce? HOW to Produce It? WHO Consumes It?

8. Economic Goals Economic efficiency Making the most of resources Freedom from government intervention in decisions on the production and distribution of goods and services Economic freedom Assurance that goods and services will be available, payments will be made on time, and a safety net will protect individuals in times of economic disaster Economic security and predictability Economic equity Balanced distribution of wealth Innovation => economic growth, and economic growth => a higher standards of living Economic growth and innovation Societies pursue additional goals, such as environmental protection. Other goals Economic Goals

9. Four Basic Economic Systems Traditional Economy Relies on habit, custom, or ritual to decide what to produce, how to produce it, and who consumes the output of the economy Market Economy Economic decisions are made by individuals acting in their self interest, and involve free exchange or trade Command Economy The government makes all decisions about the production and consumption of goods & services Mixed Economy A mixture of market and government based allocation of resources

10. Theory vs. Reality • These are conceptual frameworks • Every economy has all these elements • Describe your morning!

11. Traditional Economy …relies on habit, custom, or ritual to decide what to produce, how to produce it, and who consumes the output of the economy • Advantages: • Certainty – roles all predetermined • Stability and safety – social net • Disadvantages: • Low standard of living • Little innovation = vulnerable to external shocks What to produce? just what’s needed to meet basic needs How to produce? as it was done in the past - tradition Who consumes it? oneself and one’s family

12. Market Economy …economic decisions are made by individuals acting in their self interest, and involve free exchange or trade • Advantages: • Encourages innovation and growth • Tends toward high efficiency • High degree of freedom and choice • Disadvantages: • Unequal distribution of benefits (poverty) • Persona uncertainty • Subject to boom and bust cycles What to produce? what the market wants and will pay for How to produce? however it can done at the lowest cost Who consumes it? whoever has the money

13. Command Economy …the government makes all decisions about the production and consumption of goods & services • Advantages: • Potential fairness • Safety net – free services (education, health) • Easy to mobilize resources quickly to achieve national or societal goals • Disadvantages: • Relatively low efficiency • Weak incentives for hard work • Little consumer choice / economic freedom What to produce? what the government decides How to produce? how the government says Who consumes it? whoever the government says (ideally fair)

14. Mixed Economy …a mixture of market and government based allocation of resources • Advantages: • Reasonable innovation and efficiency • Basic economic safety net • Basic services guaranteed for all (fairness) • Disadvantages: • Some wasted or misallocated resources • Potentially slower growth than market system • Less consumer choice • Higher taxes What to produce? a mix of market and government directed How to produce? a mix of lowest cost and government plan Who consumes it? a mix of who has money and who has votes

15. Economic Continuum Total Government Control Total Individual Control Above, plus retirement programs, health care, strong employment laws Above, plus government ownership of key industries, e.g. telecom, energy, airlines, banking, and distributes certain goods, e.g. housing, food, etc. Above, plus government hands out all jobs, sets all prices, allocates food, owns all industries Above, plus basic public services, e.g. roads, fire protection, education, science Government provides public safety, enforcement of contracts and property rights, national defense