ECONOMIC SYSTEMS OF THE

WORLD

Topic 02: Microeconomics Fundamentals

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 CAPITALISM

“It is not from the benevolence of the butcher, the brewer, or the
baker that we expect our dinner, but from their regard to their
own interest.” - Smith

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 CAPITALISM

• Capitalism – an economic system based on private ownership and the use of

capital
• Capital = wealth in the form of property or money that is used to make more money

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 CAPITALISM

• 3 Main Ideas:
• Private ownership: people are free to use their capital as they choose

• Profit Motive: when enough people demand a product, producers will supply it
because they want to make a profit = law of supply and demand

• Market Economy: buyers and sellers are free to exchange goods and services, with
prices determined by supply and demand

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 CAPITALISM

• Government should not interfere in the economy.

• Laissez faire

• Laissez faire – letting owners of industry and business set working conditions without
interference
• No government regulations, such as minimum wage laws

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 CAPITALISM

• Positive Effects:
• Competition led to progress
• Encourages economic growth

• Negative Effects:
• Unequal distribution of wealth led to social unrest

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 COMMUNISM

“From each according to his/her ability, to each according to

his/her need."

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 COMMUNISM

• Communism – an economic system in which all means of production are

owned by the people, private property does not exist, and all goods and
services are shared equally.

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 COMMUNISM

• Karl Marx
• German journalist
• Radical Socialist

• Wrote “The Communist Manifesto”

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 COMMUNISM

• Friedrich Engels
• Son of a wealthy German textile entrepreneur
• Radical Socialist
• Co-Wrote “The Communist Manifesto” and “Das
Capital”

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 COMMUNISM

• In many ways, Communism was a reaction to the Industrial Revolution and

Capitalism

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 COMMUNISM

• The Industrial Revolution intensified class struggle (rich vs. poor)

• “Haves” (bourgeoisie) take advantage of “Have-Nots” (proletariat)

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 COMMUNISM

• Believe that in a Capitalist system:

• Workers are exploited by employers
• The labor of workers profits employers

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 COMMUNISM

• Marx believed that workers were controlled by false consciousness and

alienation

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 FALSE CONSCIOUSNESS

• Marx said that in a capitalist society, workers are controlled by false ideas that
are presented as universal societal values

• According to Marx: Not only are these ideas wrong but they serve an important
political function → they control the proletariat
• Hindu Caste System, Christianity, Consumerism, Patriotism, American Dream

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 ALIENATION (SEPARATION)

• Marx believed that there are 3 types of alienation in a capitalist society

• The worker is alienated from what (s)he produces
• The worker is alienated from him/herself
• People are alienated from eachother

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 COMMUNISM

• Marx and Engels called for workers of the world to unite and overthrow the
rule of the rich.
• Wealth would be redistributed based on need
• Classes and private property would cease to exist

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 COMMUNISM

• Positive Effects
• Everyone’s needs are provided for
• Can eliminate social unrest

• Negative Effects
• No incentive to work
• Frequent shortages

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 COMMAND ECONOMY

• True communism requires a command economy

• Command economy: the central government makes all important decisions in the best
interest of the society
• Government took control of land, factories, banks, etc
• Government decided what would be produced, what crops would be grown, and what
would be charged for them

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 COMMUNISM

• There have been no purely communist countries

• How can a country be communist when pure communism doesn’t allow for
governments, countries, or class divisions?
• Countries that we think of an “communist” are run by the “Communist Party”

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 COMMUNISM

• “Communist” countries have been run by dictators or have been dominated by

a single political party

• This doesn’t mean that they are run according to Marxist principles

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 COMMUNISM TODAY

• Communist Countries:
• Cuba
• China
• Laos
• North Korea
• Vietnam

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 COMMUNISM

•  The Communist Manifesto, pure communism results in a society in which all people are equal
and there is no need for money or the accumulation of individual wealth. There is no private
ownership of economic resources, with a central government controlling all facets of
production. Economic output is distributed according to the needs of the people. Social
friction between white and blue-collar workers and between rural and urban cultures will be
eliminated, freeing each person to achieve his or her highest human potential.
• Under pure communism, the central government provides the people with all basic
necessitates, such as food, housing, education, and medical care, thus allowing the people to
share equally from the benefits of collective labor. Free access to these necessities depends on
constant advances in technology contributing to ever-greater production.
• In 1875, Marx coined the phrase used to summarize communism, “From each according to his
ability, to each according to his needs.”

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 SOCIALISM

“From each according to his/her ability, to each

according to his/her work."

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 SOCIALISM

• From each according to his ability, to each according to his contribution.

• Socialism – an economic system in which factors of production are owned by

the public and operate for the benefit of all.
• Private ownership is still allowed

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 SOCIALISM

• Government actively regulates the economy

• Controls major industries and resources
• Provides social security, unemployment benefits, minimum wage, etc

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 SOCIALISM

• Marx believed Socialism was the midpoint between Capitalism and Communism.

• Socialism is an economic system where everyone in society equally owns the factors of production.
The ownership is acquired through a democratically elected government. It could also be a
cooperative or public corporation in which everyone owns shares. As in a command economy, the
socialist government employs centralized planning to allocate resources based on both the needs of
individuals and society as a whole. Economic output is distributed according to each individual’s
ability and level of contribution.

• In 1980, American author and sociologist Gregory Paul paid homage to Marx in coining the phrase
commonly used to describe socialism, “From each according to his ability, to each according to his
contribution.” 

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 SOCIALISM VS COMMUNISM

Attribute  Communism Socialism

Basic Philosophy From each according to his ability, to each From each according to his ability, to each according to
according to his needs. his contribution.

Economy Planned By Central government Central government

Ownership of Economic All economic resources are publicly owned and Individuals own personal property but all industrial and
Resources controlled by the government. Individuals hold production capacity is communally owned and managed
no personal property or assets. by a democratically elected government.

Distribution of Production is intended to meet all basic human Production is intended to meet individual and societal
Economic Production  needs and is distributed to the people at no needs and distributed according to individual ability and
charge.  contribution.
Class Distinction  Class is abolished. The ability to earn more Classes exist but differences are diminished. It is
than other workers is almost nonexistent. possible for some people to earn more than others.

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Religion Religion is effectively abolished. Freedom of religion is allowed.
 SOCIALISM VS COMMUNISM

• Communism and socialism both grew out of grass-roots opposition to the exploitation of
workers by wealthy businesses during the Industrial Revolution. Both assume that all goods
and services will be produced by government-controlled institutions or collective
organizations rather than by privately-owned businesses. In addition, the central government is
mainly responsible for all aspects of economic planning, including matters of supply and
demand.

• Under communism, the people are compensated or provided for based on their needs. In a
pure communist society, the government provides most or all food, clothing, housing and
other necessities based on what it considers to be the needs of the people. Socialism is based
on the premise the people will be compensated based on their level of individual contribution
to the economy. Effort and innovation are thus rewarded under socialism.

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 COMMUNISM

• In a communist country, the government answers those questions. There's no

private business. There's no private property. The government decides.

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 CAPITALISM

• In a capitalist society, the people make those decisions. The businesses, the

market decides how much products will cost, how many there are, where it will
be made.

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 SOCIALISM

• In the socialist system, there's a mix of both. The government operates the

system to help all, but there is opportunity for private property and private
wealth.

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 COLLAPSE OF USSR

• For much of the 20th Century, the Soviet Union rivaled the United States in political,
military and economic strength. While the central command economy of the Soviet
Union was diametrically opposed to the market liberalism of Western nations, the
rapid economic development that the Soviets posted in the middle decades of the
century made their system appear to be a viable economic alternative.

• But after growth tapered off and various reforms were instituted to revive the
stagnating economy, the Soviet Union eventually collapsed, along with its promise of
an alternative to Western capitalism. Where centralized economic planning helped spur
its mid-century growth, the Soviet Union's piecemeal reforms to decentralize
economic power ultimately undermined its economy.

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 COLLAPSE OF USSR

• These early reforms failed to revive the increasingly-stagnant Soviet economy, with
productivity growth falling below zero by the early 1980s. This ongoing poor economic
performance led to a more radical set of reforms under the leadership of Mikhail
Gorbachev. While attempting to maintain socialist ideals and central control over primary
societal goals, Gorbachev aimed to decentralize economic activity and open the economy
up to foreign trade.
• This restructuring, referred to as perestroika, encouraged individual private incentive,
creating greater openness. Perestroika was in direct opposition to the previously
hierarchical nature of the command economy. But having greater access to information
helped foster critiques of Soviet control, not just of the economy, but also of social life.
When the Soviet leadership relaxed control in order to save the faltering economic system,
they helped create conditions that would lead to the country's dissolution.

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 COLLAPSE OF USSR

• While perestroika initially appeared to be a success, as Soviet firms took

advantage of new freedoms and new investment opportunities, optimism soon
faded. A severe economic contraction characterized the late 1980s and early
1990s, which would be the last years of the Soviet Union.
• Soviet leaders no longer had power to intervene amidst the growing economic
chaos. Newly-empowered local leaders demanded greater autonomy from
central authority, shaking the foundations of the command economy, while
more localized cultural identities and priorities took precedence over national
concerns. With its economy and political unity in tatters, the Soviet Union
collapsed in late 1991, fragmenting into fifteen separate states. 

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 COLLAPSE OF USSR

• The early strength of the Soviet command economy was its ability to rapidly mobilize
resources and direct them in productive activities that emulated those of advanced
economies. Yet by adopting existing technologies rather than developing their own, the
Soviet Union failed to foster the type of environment that leads to further technological
innovation.
• After experiencing a catch-up period with attendant high growth rates, the command
economy began to stagnate in the 1970s. At this point, the flaws and inefficiencies of
the Soviet system had become apparent. Rather than saving the economy, various
piecemeal reforms instead only undermined the economy's core institutions.
Gorbachev’s radical economic liberalization was the final nail in the coffin, with
localized interests soon unraveling the fabric of a system founded on centralized control.

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MARKET SYSTEM

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 MARKET SYSTEMS
• Traditional Economy: Customs dictate the economic decisions

• Free/Market Economy: In a market economy, decisions on how resources are to be allocated are
usually taken by millions of households and thousands of firm

• Planned/Command Economy: In this second type of economy, the government has a central
role in all decisions that are made and, unlike the market economy, the emphasis is on centralization.

• Mixed Economy: As its name indicates, it involves both private and public sectors in the process of
resource allocation.

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 TYPES OF ECONOMIES

• Remember:
• the type of economy a society has influences how the society/government functions,
and vice versa

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 4 TYPES OF ECONOMIES

• Traditional
• Market
• Command
• Mixed

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 TRADITIONAL ECONOMY
• Found in rural, under-
developed countries–
• Vanuatu
• Pygmies of Congo
• Eskimos & Indian tribes
• Belarus

• Customs govern the

economic decisions that
are made
• Farming, hunting and
gathering are done the
same way as the
generation before
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 TRADITIONAL ECONOMY

• Economic activities are centered around the family or ethnic unit

• Men and women are given different economic roles and tasks
• Advantages: people have specific roles; security in the way things are done
• Disadvantages: Technology is not used; difficult to improve

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 FREE MARKET

• Characterized by:
• private ownership of property/resources
• Desire to make $$ (profit)
• competition
• consumer sovereignty
• no government intervention whatsoever

• Principles of capitalism/free market were first developed by Adam Smith

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ASSUME YOU AND A FRIEND
(THE PERSON SITTING NEXT TO
YOU) ARE OPENING A PIZZA
PARLOR. YOU RESIDE IN A FREE
MARKET ECONOMY. TAKE 3
MINUTES AND FIGURE OUT HOW
YOU WILL MAKE YOUR PIZZA IN
ORDER TO MAKE THE MOST
MONEY

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 Remember, in a true free market economy
there is absolutely no government
intervention.
It is essentially survival of the fittest.

Thus,you can buy/sell any of the following… 46

Battery Acid Pizza

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Dandelion Pizza

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Nicotine Pizza
Nicotine acts as a
stimulant in mammals and
is the main factor
responsible for the
dependence-forming
properties of tobacco
smoking. According to
the American Heart
Association, the "nicotine
addiction has historically
been one of the hardest
addictions to break."

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 ADAM SMITH

• Wrote The Wealth of Nations

• Traced the development of
industry and commerce in
Europe
- Smith concluded that a free-market
economy was the most efficient
In it he basically created the study of “economics” as we know
it today. Also provided one of the first convincing rationales
for free trade and capitalism
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 COMMAND ECONOMY

• characterized by: • Karl Marx provided the ideological foundation for

• central ownership of property/resources this system - most commonly known as
communism.
• centrally planned economy
• lack of consumer choice.

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In a command economy consumers
have very little, or no choice in what
they can purchase…
You will buy
Gov’t Inc
But it’s always Pizza and you
burnt!! I hate will like it!!!!
Gov’t Inc Pizza their pizza!

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Or even their occupation...
I really enjoy Not anymore you won't. We need
workin' on the good to industrialize quickly. You must
ol' farm move to the city and work in the
steel factory!!

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 KARL MARX

• Founded communism
• (With Freiderich Engels)
• Stressed an economy controlled by the government
• His goal was to prevent human alienation and end individual greed

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 MARX CONTINUED...

•Wrote The Communist

Manifesto – felt that
capitalism was inherently
evil and that workers
should unite and revolt
against it
–Last line of the book,
“Workers of the world
unite!” 55
 MARX CONTINUED...

• Marx broke down society into

two basic classes:
• The proletariat – the working class
• The bourgeoisie – the owners of
capital (factory owners)

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 MARX CONTINUED…

• The totalitarian and often violent form of communism that emerged in the early
20th century was nothing like what Marx envisioned.
“The death of one person is a tragedy, the death of a million
is a statistic” – Josef Stalin

• The idea of a classless society is a noble idea, however, it has been almost
impossible to implement
• (His ideas work in theory, but not in practice)

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Communist Countries today:
China, North Korea, Laos, Vietnam, Cuba
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 MIXED ECONOMY

• Individuals and businesses make decisions for the private sector

• Government makes some decisions for the public sector (ex. regulation of
monopolies)
• Government's role is greater than in a free-
market economy, but less than in a command
economy
• Most economies in the world today are
mixed economies
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And you can buy your pizza wherever you
want to…

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MARKET STRUCTURE

Competitiveness of Markets
 WHAT IS MARKET?

• Market is defined commonly as a place where commodity or service is bought and sold.

• But in economics the term market does not refer to a particular place but it refer to a commodity or a
service market.

• The market is a set of conditions in which buyers and sellers come in contact for the purpose of exchange.

• Economics usually classify market structure on the basis of two criteria-

The number of firms working in the market.
The characteristics of product.
 WHAT IS MARKET?

• On the basis of these criteria economics consider four important types of

market:

• Perfect Competition
• Monopoly
• Monopolistic Competition
• Oligopoly
 PERFECT COMPETITION

• Perfect Competition may be defined as a market situation in which a single

market price is ruling for the commodity, which is determined by the forces of
total demand and total supply in the market.

• It is the most competitive market structure of the economy.

• Perfect Competition is said to prevail in the market when the following

condition exist:
 PERFECT COMPETITION

• Large number of buyers and sellers

• There are large number of firms in the industry. The output of an individual firm is a very small of the total output of the industry
therefore an individual firm has no command over the price. So does the buyers therefore both the agents have to accept the given price.
• Existence of homogeneous product

• The product is homogeneous in the sense that they are perfectly substitute from the buyers point of view. This ensures that no firm can
change a price even slightly above the ruling market price. Because if it does so, the firm will lose all his customers.
• Perfect Knowledge about Market

buyers also have perfect

• sellers possess perfect information regarding the market price, quality of product, number of competitors, substitute etc. while
knowledge about the market conditions there is no need to do any expenditure on publicity and advertisement.
• Non existence of transport costs:
• It assume that the various firms so close to each other that there are no transport cost. Therefore, uniform price prevail.
• Perfect mobility of factors of production:
• Factors of production are free to switch from one industry to other and from one place to other.
• Free entry and exit:
• No barrier on any firm to enter or to exit from the market
 MONOPOLY

• Monopoly means power to sell alone, in other words when there is only one single
seller of a product in the market, that situation will be referred to as monopoly.

• Monopoly market structure is the least efficient market structure.

• There are two kinds of Monopoly;

• Pure Monopoly
• Limited Monopoly
 MONOPOLY

• Pure or Perfect or absolute Monopoly:-

• If in a market there is one single seller of a product and there is no competition at all. The situation will be known as
pure-perfect or absolute Monopoly.
• In technical language we may define pure Monopoly as single firm industry.
• Where the cross elasticity of demand between the product of the firm and that of other commodity in the market is zero.
Zero cross elasticity implies that there is no substitute (close or far)available in the market and monopolist has perfect
control over the supply of product.
• Limited Monopoly
• It is a market situation in which there is a single seller of the product for which there are no close substitute. In other
words the substitute of the product is available in the market but they are not close substitute. In this way under
imperfect monopoly far substitute are available and therefore the monopolist is not so powerful as the pure monopolist.
• In technical language we may defined imperfect monopoly as a single firm industry. Where the cross elasticity of
demand between the product of the firm and that of other commodity in the market is small or above zero.
 CHARACTERISTICS OF MONOPOLY

• In monopoly there should be only one seller in the market.

• Monopolist has full control over the supply because he is alone in the market.
• In a monopoly market the monopoly firm itself is the industry-therefore monopoly know as
single firm industry.
• In monopoly, firm is in a position to determine the price in this way monopolist is price maker.
• The demand curve of monopoly firm is relatively inelastic. It is downward slopping curve. It
suggests that the monopolist can sell more output only by reducing the price.
• In monopoly firm is in a position to earn abnormal profit.
• In monopoly the unity of product is homogeneous.
 MONOPOLISTIC COMPETITION

• The term Monopolistic competition is frequently used as synonyms of imperfect

competition.

• According to the classical economist there are only two types of market in market structure.
(1)Perfect competition (2)Monopoly- But in actual life it is almost impossible to discover a
single commodity which is sold under perfect competition and it is equally difficult to
discover example of pure Monopoly.

• The large majority of markets in real life display the characteristics of both monopoly as well
as competition in some the monopoly element predominates while in other competition hold.
 CHARACTERISTICS OF MONOPOLISTIC
COMPETITION

• Existence of many Firms

• Under Monopolistic Competition there are many firms working in the industry each of them producing
differentiated product which are relatively close substitute for each other
• Under Monopolistic Competition the number of firm is fairly large and therefore the size of the each firm
under Monopolistic Competition is small. As result an individual firm has relatively small part of the
total output. So that any action on its part to increase or decrease the output and price will have little or
no effect on the rival firms.
• Product differentiation

• Firms under monopolistic competition produce not homogeneous or

identical product but differentiated product which are closely related to
each other.
 OLIGOPOLY

• Oligopoly is that market situation in which a firm formulates its market policy
in part on the expected behavior of few close rivals.

• Thus Oligopoly is that form of imperfect competition where there are few firm
in market producing either an homogeneous or differentiated product which are
closely substitute.
 CHARACTERISTICS OF OLIGOPOLY

• Few firms are working in the industry with barriers to entry and exit. Number of
firms should be between 3 to 20 in Oligopoly market.
• The sellers supply either homogeneous product or differentiated product.
• The firm has a high degree of interdependence in their business policy about
fixing of price and determination of output.
• The product under Oligopoly contain high degree of cross elasticity of demand.
• Advertising and selling costs have strategic importance in an oligopoly market.
• Competition is of unique type in an Oligopolistic market each firm has to make
constant struggle with rivals.