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0:00 hello everyone and welcome to business school 101 in this video we are going to learn about the major economic systems in the world generally a society's economic system answers three fundamental questions what do we produce how do we produce it and who receives it by definition an economic system is a means by which societies or governments organize and distribute available resources services and goods across a geographic region or country economic systems regulate factors of production including land capital labor and physical resources it encompasses many institutions agencies entities decision-making processes and patterns of consumption that comprise the economic structure of a
0:46 given community we can identify three general types of economic systems in the world these are the market economy command economy and mixed economy the first economic system that we need to know about is the market economy in a pure market economy all productive activities are privately owned rather than being controlled by a government production is determined by the interaction of supply and demand signal to producers through the price system if demand for a product exceeds supply prices will rise signaling producers to produce more if supply exceeds demand prices will fall signaling producers to produce less in this system consumers are paramount
1:32 the purchasing patterns of consumers as signaled to producers through the mechanism of the price system determine what items are produced and in what quantity the major advantages of a market economy include the following first efficient allocation of resources a free market allows supply demand and prices to all work in tandem this means that when demand falls producers know that they need to make a change in other words it might be time for them to introduce a new product or to reduce prices if a company's profit begins to decrease then it is forced to adapt and cater to the customer second innovation and economic growth a free market is comprised of innovative companies that create desired products
2:18 because if they don't then they will go out of business at the same time companies are incentivized by the need for profit to increase the efficiency of production by reducing the cost of production companies free up economic resources for use elsewhere in the economy and contribute to higher growth third more choices for consumers a market economy creates additional competition not only domestically but also abroad in turn that creates more choices for the average consumer there are thousands of consumers with different tastes and preferences and those preferences will be catered to if there is profit to be made we only need to look at the wide variety of cell phone brands that are available today as an example
3:04 fourth absence of red tape in a pure market economy there are no regulations or other restrictions that can make it difficult to start and maintain a business this helps increase the flow of new businesses entering the market thereby creating a more competitive environment at the same time it makes it easier for companies to do business and concentrate on making a product that consumers want despite all of these benefits market economies also have many disadvantages number one monopolies there are natural monopolies such as utilities sewer services and train lines that present a big issue to free markets in such markets the cost enter is huge for example a utility company may need
3:50 to create a whole new supply network for customers houses which is economically inefficient as a result one company may be able to dominate the market and charge prices above the market rate number two absence of public goods in a pure market economy public goods like free health care and education don't exist because all hospitals and schools are run by private enterprises that are driven by profit this could ultimately lead to many people being unable to access such services because they can't afford them number three negative externalities when there are no regulations or restrictions companies are free to produce negative externalities such as pollution for example as one of the largest
4:37 environmental disasters in us history the 2010 deepwater horizon oil spill was largely attributable to the use of substandard cement and other cost-cutting measures if there are no set laws to limit a firm's air water or waste pollution then society is a whole pace for the consequences number four race to the bottom one of the most commonly stated disadvantages of a free market is the proverbial race to the bottom in other words in a bid to become as profitable as possible businesses often reduce quality and cut corners to maximize profits number five market failure when a free market economy spins out of control the consequences can be severe from the
5:23 great depression of the 1930s to the real estate market crash of 2008 market failures have devastated the lives of millions by resulting in lost income unemployment and homelessness many of these failures have stemmed from those seeking short-term profits over slow and steady gains these businesses are usually aided by loose credit highly leveraged assets and minimal government intervention now that we have discussed the pros and cons of the market economy let's learn about the opposite the command economy a command economy also known as a centrally planned economy is the system in which the government rather than the free market determines what goods should be produced how much should be produced and the price at which the goods are sold it also determines investments and
6:11 incomes the command economy is a key feature of any communist society cuba north korea and the former soviet union are examples of countries that have command economies in a command economy government officials set the national economic priorities including how and when to generate economic growth how to allocate resources to production and how to distribute the resulting output these decisions often take the form of multi-year plans that span the entire economy a government that runs a command economy operates monopoly businesses or entities that are considered necessary in order to meet the goals of the national economy in cases like these there is no domestic competition in the industries examples include financial institutions
6:58 utility companies and the manufacturing sector compared to the market economy the command economy has only three major advantages first less inequality because the government controls the means of production in a command economy it also determines who works where and for how much pay this power structure sharply contrasts a free market economy in which private companies control the means of production and hire workers based on business needs they also pay the workers wage that are set by market forces second low unemployment levels unlike the invisible hand of the free market which cannot be manipulated by a single company or individual in a command economy the government can set wages and job openings to control
7:44 the unemployment rate and wage distribution as it sees fit this could help reduce the number of homeless and hungry people third increased focus on the common good whereas the motivation for profit drives most business decisions in a free market economy it is a non-factor in a command economy therefore a command economy government can tailor products and services to benefit the common good without regard to profits and losses for example most true command economy governments such as cuba offer free universal health care coverage to their citizens despite its advantages a command economy suffers many serious limitations number one lack of competition hinders innovation [Music]
8:29 critics argue that the inherent lack of competition in command economies inhibits innovation and keeps prices from resting at an optimal level for consumers although those who favor government control criticize private firms that value profit above all else it is undeniable that profit is a motivator for businesses and drives innovation in fact many advancements in medicine and technology have come from countries with free market economies such as the united states and japan at least partially for this reason number two inefficiency efficiency is compromised when a government acts as a monolith by controlling every aspect of a country's economy production in command economies is notoriously inefficient as the government feels no pressure from competitors
9:15 or price conscious consumers to cut costs or streamline operations they also may be slower to respond or even fail to respond completely to consumer needs and changing preferences number three too much power in a command economy too much power in the hands of one entity could lead to laws or rules that infringe on human rights and workers rights for instance the state can mandate shifts that exceed 12 hours in order to reach a particular quota not meeting the desired quantity of outputs could lead to serious financial political or even legal consequences additionally the strict quotas mandated by the government could lead to workers cutting corners in production which could result in inferior products
10:03 as we have learned in this video both market and command economies have distinct advantages and disadvantages however in the real world it's actually quite difficult to find either a pure market economy or pure command economy in fact almost all economic systems are blended to some extent in other words they combine elements of both market and command systems these types of economic systems are referred to as mixed economies let's say that the pure market economy and the pure command economy are two ends of the spectrum the u.s canada and the uk economies are undoubtedly positioned towards the market-oriented end in recent years china has gotten closer to having a market-oriented system however it still remains more of a command economy because state-owned
10:50 enterprises continue to play a critical role in china's economy north korea and cuba are currently the countries that are closest to pure command economy end of the spectrum which means that most of the economic decisions and activities in those countries are decided and controlled by their governments mixed economies have their own features that are distinct from market and command economies in a mixed economy certain sectors are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning the most common sectors that are owned and controlled by governments include national defense public transportation energy education health care and other essential industries that are closely related to
11:35 social welfare and contribute to the common good in mixed economies governments sometimes take charge of troubled privately owned firms whose continued operations are considered vital to national interests for example the french government took over renault a french automobile company when it ran into serious financial problems the french government reasoned that the social costs of the unemployment that might result if renault collapsed were unacceptable so it nationalized the company to save it from bankruptcy similarly in 2008 and early 2009 the us government took an 80 stake in aig an american multinational finance and insurance corporation to prevent it from collapsing the rationale in this instance was that if
12:21 aig did collapse then it would have very serious consequences for the entire financial system the us government usually prefers market-oriented solutions to economic problems so in the case of aig the intention was to sell the institution back to private investors as soon as possible the united states also took similar action with respect to a number of other troubled private enterprises including citigroup and general motors in all of these cases the government's stake was seen as nothing more than a short-term action designed to stave off economic collapse by injecting capital into troubled enterprises as soon as it was able to the government sold these stakes for example the us government sold its stakes in citigroup aig and gm in 2010
13:08 2012 and 2014 respectively please notice that a mixed economy can emerge when a government intervenes to disrupt a market economy by introducing state-owned enterprises regulations subsidies tariffs and tax policies it can also emerge when a command economy make exceptions to the rule of state ownership in order to capture economic benefits from private ownership and free market incentives so a combination of free market principles like private contracting and socialist principles of state ownership or planning is common to all mixed economies now let's wrap up today's discussion with an in-depth summary an economic system is a means by which societies or governments organize and distribute available
13:54 resources services and goods across a geographic region or country we can identify three general types of economic systems in the world these are market economy command economy and mixed economy in the pure market economy all productive activities are privately owned and the goods and services that a country produces are determined by the interaction of supply and demand conversely in a command economy the government plans the goods and services that a country produces the quantity in which they are produced and the prices at which they are sold although both the market and command economies have distinct advantages they also suffer significant limitations this is why almost all modern economic systems in the world are mixed to some extent which means
14:41 that they combine elements of both the market and command systems it is also worth mentioning that economic systems and political ideologies are closely connected in countries where individual goals are given primacy over collective goals market-based economic systems are more common however in countries where greater significance is placed on collective goals the nation may have control over many enterprises markets in these types of countries are likely to be restricted rather than free additionally please keep in mind that because certain countries differ so dramatically in terms of cultural backgrounds social values legal systems and levels of economic development there is no such thing as a best economic system that is appropriate for every country in the world whether or not the government should
15:27 intervene in the economy how it should intervene and to what extent it should intervene all depend upon a comprehensive understanding of that country's big picture alright that's all for today's topic what do you think about the economic systems in the world do you prefer a market economy a command economy or a mixed economy please leave your thoughts in a comment below thanks for watching and i will see you next time
