Econ Class 4

Understanding Types of Economic Systems:

• Can government run an economy? This is the main idea around economic systems.
• Economics vary when it comes to government involvement. The relationship between government and the economy has been debated for a long time.

title: Definition:
**Economic Systems**: A social science that analyses the production, distribution, and consumption of goods and services. There are many different economic systems in the world.

Compared to...

title: Definition

**Economic Schools of Thought**: A group of economic *thinkers* who share a common perspective and belief on how economies work and how they should be run.

• Capitalism:

title: Definition

Capitalism: An economic system where means of production like factories, equipment, etc. are **private owned** rather than controlled by the government.

Capitalism(cont.):

• Laissez-Faire
  • The idea that the free market, through supply and demand, will regulate itself if government does not interfere
  • Government should be "hands off" with big business.
  • Example: Rise of Industry in America in 19th century.
• Supply and Demand (not tested)
  • The way a market regulates itself in a capitalist society.
  • Prices adjust because of what happens in the market, and are crucial to capitalism.

Strengths of Capitalism:

• A warning! - If governments own the means of production and set prices, it invariably leads to a powerful state and creates a large bureaucracy which may extend into other areas of life. This system doesn't work.

• Efficiency - Firms in a capitalist based society face incentives to be efficient and produce goods which are in demand. These incentives create the pressures to cut costs and avoid waste.

  • If not, they will lose against firms that are.

• Innovation - With Capitalism entrepreneurs and firms are seeking to create and develop profitable products. Therefore, they will not be stagnant but invest in new products which may be popular with consumers. This can lead to product development and more choice of goods.

• Economic Growth - With firms and individuals facing incentives to be innovative and work hard - creates a climate of innovation and economic expansion,

• This helps to increase real GDP and lead to improved living standards.

  Weaknesses of Capitalism:

• Monopoly power - Private ownership of capital enables firms to gain monopoly power in product and labour markets. Firms with monopoly power can exploit their positions to charge higher prices.

• Social benefit ignored - A free market will ignore both positive and negative externalities. e.g. doesn't care about climate change, only profits.

• A profit maximising capitalist firm is likely to ignore negative externalities, such as pollution from production, this can harm living standards.

• Similarly, a free-market economy will under-provide goods with positive externalities, such as health, public transport and education.

• This leads to an inequitable allocation of resources.

• Inherited wealth and wealth inequality - A capitalist society is based on the legal right to private property and the ability to pass on wealth to future generations.

• Capitalists argue that a capitalist society is fair because you gain the rewards of your hard work.

• But, often people are rich, simply because they inherit wealth or are born into a privileged class. Therefore, capitalist society not only fails to create equality of outcome but also fails to provide equality of opportunity.

• Inequality creates social division - Societies which are highly unequal create resentment and social division.

Capitalism Pros:

• Incentives to be rich, encourage innovation
• Firms have incentives to be efficient
• Consumers free to choose products they desire
• Prevents large bureaucratic government
• Better than alternatives

Capitalism Cons:

• Firms can gain monopoly power and exploit consumers
• Firms with monopoly power can pay low wages
• Externalities can damage the environment
• Tends to lead to large inequality
• Prone to 'boom and bust' economic cycles

Socialism:

• A political and economic theory that advocates ownership of the means of production such as factories and farms by the people, rather than capitalists.
• Power is in the hands of the working class

title: Definition
Socialism: Means of production are owned by the people, rather than the capitalists.

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