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Economic Systems

Economic Systems

Author: James Howard

This lesson is an introduction to economic systems and factors of production.

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Hello, and welcome to this short tutorial on economic systems. Now, as always with these tutorials, please feel free to fast forward, pause, or rewind as many times as you need in order to get the most out of this tutorial.

Now, as it turns out, the entire world gets to share resources. Each country gets resources, not only from within its own borders, but also from around the world. Now, each country then gets to decide how best to distribute those resources within their own country. What kind of economic system, if I had to ask you, would you say the US has? Got your answer?

Excellent. Hold that thought, and let's see if we're right at the end. What we're going to cover in this tutorial are factors of production and economy systems. The key terms for this lesson are going to be factors of production, economy systems, planned economy, market economy, and the mixed market economy.

Well, we're going to start with factors of production. Now, factors of production are merely the resources necessary to produce output. Those factors of production are split in the following way. First, you have physical resources, and these are tangible items that go into the production of whatever it is the business is making. You have human resources. Now, this is the labor involved in making and distributing and selling that particular product or service. You also have capital. Now, capital, that's the funds that the business uses to operate the business and also to grow or expand the business.

Entrepreneurs-- now, this is a special type of human resources. These are folks who help to expand and grow the business in creative ways. You could think of them like innovators, if you like. Information resources-- now, this is part of factors of production. That's the intangibles, the patents, the ideas that the company has and owns that make the company who it is.

Economy systems are how a society chooses to distribute goods, services, and resources. And we're going to see two broad categories of economy systems. The first one we're going to look at is the planned economy. Now, the planned economy, it's where a central authority controls and chooses how to distribute resources for the production of goods and services.

Now, under a planned economy, we have two major types. Those two types are communism first. Now, communism was introduced by a man named Carl Marx. And under this particular planned economy, the government owns all business. It is the ultimate arbiter in how resources are distributed and how much gets produced. In the modern world, we see communism active in places like Cuba and North Korea.

The second type of planned economy we're going to look at is socialism. Now, socialism is where government owns select business or pieces of the economy. Examples of this are found predominately throughout Europe. And a great example is the National Health System in the United Kingdom. Under that system, the government decides how health care is distributed among the populace.

Other good examples are Air France and Air India in those respective countries. Those are the state or flag airlines for those particular countries. In those cases, the government decides how the airline is run, how many flights they have and what rounds that they're going to fly.

Now, the next type of economy we're going to look at is the market economy. And this is where supply and demand dictate how to distribute resources for the production of goods and services. You might have heard this referred to as capitalism. Now, capitalism, in this market economy, private owners are responsible for and focused on the development of wealth. Those private owners and their consumers get to drive how the market works. They control what's produced through supply from the producers and the demand from the consumers.

Well, the US, to answer that question I asked at the beginning, is a mixed market economy. Now, this is a combination planned economy and market economy. Now, the US operates differently than other countries around the world. It's more laissez faire from places like China or France. Now, laissez faire capitalism was an idea that was introduced by a man named Adam Smith in his book The Wealth of Nations.

Now, an interesting thing about markets around the world now is this privatization of those state-owned businesses in places like Sweden or France or India, that Air India and Air France example I gave earlier, for example. What you see is an increased tendency to divest those businesses from the government and put them into private hands. A great example of this Lufthansa Airlines from Germany. It was completely state owned up until 1994, at which point the government divested itself from the airline, and now it is run as a private company.

So what did we learn during this lesson? We looked at factors of production, those resources that we use-- intangible and tangible-- to produce output from a company. And we also looked at different types of economy systems, those planned market economies.

Well, I want to thank you for spending some time with me. I hope you had a good time and leaned something. I'll see you next time.

Terms to Know
Economy Systems

How a society chooses to distribute goods, services, and resources.

Factors of Production

Resources necessary to produce output.

Market Economy

Supply and demand dictates how to distribute resources for the production of goods and services.

Mixed Market Economy

A combination of a planned economy and market economy.

Planned Economy

A central authority controls and chooses how to distribute resources for the production of goods and services.