Economic Systems

Video Transcription

Hi, I'm Jeff, and in this lesson, we'll discuss economic systems and the factors of production that define those systems. So let's get started.

First, we'll talk about the factors of production. These are the resources necessary to produce output for a business. Economic systems differ in how these resources should be used, and some of the resources are physical resources, which is something tangible used by a business, human resources, the labor of people that goes into creating a product or service, capital, which is the monetary funds invested in a business's operation, entrepreneurs, specific people focused on growth through more creative means, and information resources, which can encompass ideas, patents, data, or theories used in the operation of a business.

Now that you know the factors of production, let's review some common economic systems. An economic system is how a society chooses to distribute goods, services, and resources. Now rarely as a society one type or another. Instead, they are often mixes of the different systems, and here are a few.

A planned command economy, this is where a central authority such as a government controls and chooses how to distribute resources for the production of goods and services. Now there are two major forms of planned economies, communism and socialism. Communism is where the government owns and operates all businesses. The government tells you where to work, how much you are paid, and how resources are distributed. There are few communist economies, but two examples are North Korea and Cuba.

Socialism is where the government only owns and operates select businesses. Those businesses are often ones that deliver goods and services to a majority of the people, so by managing those businesses, the government manages a significant portion of the economy but not all of it. An example of a socialist economy would be Sweden.

The writings of the economist Karl Marx have contributed much to the theories of communism and socialism though his specific brand of economic system is known as Marxism. Marx published much on the relationship between worker labor and capital.

Another economic system is the market economy. In this system, individual producers and consumers controlled the production through supply and demand. The most prominent form of this economic system is capitalism where private owners of business and property focus on the development of wealth.

In pure capitalism, the prices of all goods and services would be determined by market demand and available supply. High demand and low supply would lead to higher prices while low demand and high supply would lower the prices. Pure capitalism rarely exists, though, since governments often place regulations on specific types of business.

So many nations throughout the world including the United States have a mixed market economy. This is a combination of a planned economy and market economy. Most products and services in this system are priced according to supply and demand, but when production impacts a significant number of people, then the government uses regulations to provide consistent ongoing production. Food creation and distribution is an example of production that governments often regulate

The United States though does operate business differently than other countries such as China or France. It is more based on the laissez faire capitalism of Adam Smith. Laissez faire means let them do or let it be, and it theorizes that the invisible hand of supply and demand can provide quality in areas where other countries rely upon regulation from a central authority.

Over the course of its lifetime, a nation can transition through different market economies. Governments might regulate areas that weren't regulated before in a shift to socialism, or privatization might occur where former government programs become part of the free market system. Countries such as France has shifted between socialism and capitalism in an attempt to find a balance that suits the current needs of its people.

India, which traditionally used central planning for its economy has been shifting to a free market economy since an economic crisis in 1991. As such, it has become one of the fastest growing economies in the world. Even Sweden often hailed as a model socialist country has been cutting back on government regulation to inspire the free market.

And that's all for this lesson. Good job. You learned about the factors of production and about the most common economic systems in the world such as the planned command economy, the market economy, and the mixed market economy. Thanks for listening and have a great day.