Here: (it is way to long)

MY NOTESSSSSSSSSSSSS

if u dont understandif the section isnt finished there sholuld be a ppt abt it

Economics:

Study of rationing systems, where there are not enough resources so we study how to best allocate these resources There are usually two different economies Planned Economies Government is in charge of distribution Free Market Everyone is able to get what they have when they want it, if they have the money Definition: economics is the study of how scarce resources are allocated to fulfil the infinite wants of consumers

Scarce resources—resources with a value or price attached Allocated—given to the person Infinite wants—wants, needs, desires, whatever Consumers—everyone NEEDS

Definite amount of need Basic necessities Water Food Clothing Shelter WANTS

Not definite amount of want, and always changes—often very quickly as well, hence we have trends and ‘pop culture’ Not necessary for survival, but are things people would like to have A second/better phone Car The Economic Problem

We have unlimited wants, however, our resources are scarce in comparison Resources include land, labour, capital Thus, we have to allocate our resources and be careful with our use of these resources, deciding what to put resources in to get as much of what you want as possible What goods and services should an economy produce? Should the emphasis be one agriculture, manufacturing or services, should it be on sport and leisure or housing How should goods and services be produced? Labour intensive, land intensive, capital intensive? Efficiency? Who should get the goods and services produced? Even distribution? More for the rich? For those who work hard? Opportunity Cost

When a choice is made, it involves a sacrifice known as an opportunity cost Often measured in terms of goods, services, or monetary value given up (relative to the alternative course of action) Definition: opportunity cost is the real cost of the next best alternative that is forgone

‘next best alternative’ implies there is a scale of preference Factors of Production

Land

Anything that comes from the earth, including natural resources

Labour

Time and effort of the people used in production

Capital

All non-natural resources or tools that are used in the creation and production of other products, including humans

Entrepreneurship

Refers to the management, organisation, and planning of the other three factors of production to create the product

Free and Economic Goods

Free: Does not incur any opportunity costs in its production or when consumed Not relatively scarce—not limited in supply Will not have a price Economic Has an opportunity cost Uses scarce resources Will definitely have a price Types of Products

Consumer goods Products sold to the general public Durable: products that last a long time, and can be used repeatedly. Can also be known as white goods Sofa, chair, etc. Non-durable goods/perishable goods: products that need to be consumed very shortly after purchase Fruits and vegetables Production Possibility Frontier

Shows the boundary of what is possible and is used as an illustration in economics to show the choices facing all countries in producing goods which use limited factors of production Shows how many things we can create with a certain amount of resources, and how many of something we’re giving up Production How much we produce, output of goods and services Possibility Maximum attainable amount Frontier Border, boundary Demonstrates how opportunity costs arise when individuals or the community makes choices Shows the various combinations of two alternative products that can be produced, given technology, fixed quantity of resources and when all resources are used to their full capacity We assume the following when drawing one of these diagrams There are only 2 products we are comparing There are no more resources available, and the amount is fixed Productivity does not exceed this amount If resources increase (or efficiency I guess) then the graph moves to the right There are also two other points in the graph, being named the “G point” and the “F point” The “G point” resides inside the frontier and represents under-utilisation of resources The “F point” is outside the frontier and is currently impossible since we don’t have enough resources Perfect PPFs rarely exist due to the skills of workers. For example, perhaps you have 100 pizza makers that can make 1000 pizzas with the resources and only 1 person who knows how to make computers. Even if you allocate all resources into making computers, the amount of people who can make computers is still only 1, and thus productivity is still really low…? Perfect PPFs assume that all pizza workers know how to make a computer, and can be changed in accordance Please Note:

“Shift” and “move” are different things, really really different things and can mean losing a mark or two in a test… somehow… School of Economic Thought

Classical Economics (Classical Political Economy) Keynesian Economics Supply Side Economics Monetarism Austrian School Behavioural Economics Classical Economics was invented by Adam Smith, and was first introduced in his book, ‘The Wealth of Nations.’

Adam Smith is considered the ‘father of economics.’

Classical Economics Theory was brought into the mainstream by Scottish economist Adam Smith Instead of gold and silver an economy has, the wealth of a country should be measured by how much supply and demand a country has The idea of merchantism

Zero-sum game Every single country has a finite amount of money and resources—only by stealing can you gain more money than others This theory was the main theory back then, and it was heavily opposed by Adam Smith He decided that government intervention in the market-place should be ruled out, and that markets should sort themselves out Proposed ‘the invisible hand’ (supply and demand) The Rise of Classical Economics

Many fundamental economic theories such as supply and demand were a product of classical economics Determines which service exists and which one doesn’t If something doesn’t have enough demand, then the job will cease to exist. If a job is profitable, then the job will flourish Prior to the rise of this classical economics, many markets were under the control of some type of monarch I.e. King could raise taxes and no one could do anything about it Classical economics proposes that the King and the Queen should not have absolute power in this regard The economy in this case was tightly controlled by the state Classical Economics opposes this ‘command and control’ system like the monarchy, and became associated with freedom Classical Economics

The constant pressures on the market supply and demand causes the natural movement of prices and the flow of trade The invisible hand is part of this ‘laissez-faire,’ meaning “let go” This suggests that the market will find its equilibrium without governments or other interventions forcing it into unnatural patterns For example, the government paid for the construction of the school. Education costs around $20,000 a year (even in public schools) The government pays this price for your education Uh, public services are paid for by the government (don’t know how this ties in) Classical economics argued that there was no need for the government to intervene in markets Famous Economists

Adam Smith Wrote ‘The Wealth of Nations’ (1776) Father of classical economics David Ricardo Works on international trade Robert Malthus Views on population growth John Stuart Mill Studied the determination of prices as a result of supply and demand Karl Marx Whose views on theory of value marks a difference with the other classical economists He created socialism, which is seen as a bad thing…

Adam Smith created this response as a response to the inefficiency of the British Monarchy at the time of its fall

Keynes’ theory was the product of other historical events, and was eventually perfected by his followers

Keynesian Economics

In 1936, Keynes published a book called ‘The General Theory of Employment, Interest, and Money,’ causing a shift in economics at the time

This happened at the height of the Great Depression Banks loan more than what they have (20-30 times more), resulting in huge withdraws being an enormous problem, and which led to the Great Depression People started losing confidence in banks Right after the Roaring 20’s, which had been a result of the ending of WW1, which saw a huge increase in the importance of the US Keynes’ book emphasised the study of economic behaviours of individuals and companies (microeconomics) to the study of the behaviour of the economy as a whole (macroeconomics)

He believed that banks should not collapse at the time that they should have (the Great Depression)

The main thrust of his revolutionary theory is the idea that the aggregate demand created by households, businesses, and the government and NOT the dynamics of free markets is the most important driving force in an economy

In simple terms, he believed that we should all go back to central planning

He also suggested that free markets have no self-balancing mechanisms, which lead to full employment, meaning that government’s intervention in the economy through public policies are necessary

As seen through COVID, through government packages This idea has greatly influenced govenrments world-wide to accept their responisbility to provide full or near-full employment through measures that stimulate aggregate demand

Measures may include deficit spending Interest rates are very important, as they control pretty much everything (this is why interest rates are always covered on the news)

As they increase or decrease, employment and inflation rates fluctuate After WW2, all countries traded with gold (with each other). Led to pirates

All gold was traded for the US dollar

The essential element of Keynesian economics is the idea that macroeconomy can be in disequilibrium (recession) for a considerable time

He advocated higher government spending to help recover from a recession

Supply Side Economics

This is the theory that income taxes reduce incentives for work, savings, and investment, and that accelerated economic growth without inflation can be achieved by increasing the supply of goods and services

It suggests that every problem is based on supply. With less tax, people have higher incentives to go to work, save and invest.

However, in practice, income tax has already been cut (95% of all Australians will be cut by 7.5%) starting from the first of July this year.

This theory advocates large scale tax cuts for individuals and corporations, without any regard for what business type they are, and strong incentives for investment

It’s the theory that increased production drives economic growth

Thus, if we provide tax cuts, there will be more growth in the economy

Supporters of this theory:

Reaganomics Bush Tax Cuts Trump Tax Cuts Economists associated with supply side economics

Robert Mundell Arthur Laffer Herbert Stein Monetary Economics

Where every single problem in the economy can be solved my more or less money. It suggests that the money supply is the most important driver of economic growth

CALE HENITUSE MOMENT?!?!?! As the money supply increase, people demand more goods and services, meaning factories create more and there are thus, more jobs

However this theory is not the case.

Central banks play a critical role as they control how much money is in circulation through loans. They can see how much money is in the economy.

That means that the interest rates will decrease (no need to loan), and consumers can loan more to buy big items such as houses and such.

Decreasing money supply raises interest rates, making loans more expensive and slowing economic growth.

Central banks have huge power in this economic theory, and can control pretty much anything

Adam Smith

18th Century Scottish economist and philosopher First idea: 1766 “wealth of Nations” Philosophy of ‘Free Markets’ Free Market

The free market is Adam Smith’s position on the British monarchy, and his criticism of the strict government control over the markets in response.

Free Markets means that the people have the freedom to produce and exchange goods. This type of market has limited government intervention and taxation in the markets.

Adam Smith saw the government only responsible for the education and defence sectors of the country, to prevent the monetisation of things like safety and education Once we start to market education, then it would be a luxury, and price would skyrocket Defence is the same—people will help the one with the more money, and thus it’s not much of ‘defence’ more than a mercenary Adam Smith also proposed the idea of ‘invisible hand,’ where the forces of supply and demand of every person helps to create the best outcome for everyone.

The free market is an open market for domestic and foreign competition, resulting in high competition and lower prices in shoes as each business competes.

This theory of Adam Smith only works when the skillsets for all jobs are roughly equal—some jobs these days have high skillsets, while others have lower skillsets, creating a disparity.

One person may be able to respond to change in demand by learning different skills, while the other will not For example, a CEO may be able to respond to change in demand from high car demand to high motorbike demand by simply changing the things he sells to respond to this change However, a cashier will not be able to respond to this change. Adam Smith also proposed ‘Assembly-line Production Methods,’ where one person has one job.

For example, a water bottle. One person is responsible for the welding of the plastic and solely that. That is all he does. Another person takes this body, and attaches a head to the bottle. That is all he does.

This idea makes production far cheaper, and allows for a level of secrecy, where none of the employees have the full skillset to steal designs and such, as they are only responsible for one thing.

This division of labour results in specialisation, and making the process for efficient

Assembly-line production methods Evolution from land-based wealth to wealth created by assembly-line production Division of labour resulting in specialisation produces prosperity

David Ricardo

1817 “principles of political economy and taxation” Back then, the whole idea of tax was different. Tax was considered food, meaning taking tax was taking food and resulting in less food to feed your family. He wasn’t particularly favoured for his ideas during his time. Comparative Advantage

Countries can benefit from international trade by specialising in the production of goods for which they have a relatively lower opportunity costs even if they do not have an absolute advantage.

Across the world, this theory states that the country who can produce the good at the lowest opportunity cost should produce the good, since the other countries can produce other goods.

This leads to specialisation, resulting in high efficiency in the production of the good.

One of Ricardo’s ideas, based off Adam Smith’s school of thought.

Absolute Advantage

Most effective. Basically, a country can produce more of something than another country, at a higher quality, speed, etc.

Building on comparative advantage, also by David Ricardo, inspired by Adam Smith.

Labour Theory of Value

Value of a good should not be based on the compensation paid for labour but on the total cost of production.

This means that if you were to put 5 hours of work into making a bag—with one hour equalling $20—then you would want to make sure that you sell this bag for more than $100, to make profit.

We should find someone who can do this for cheaper, according to this theory.

Rule of 20

If there are 10 things in your life, and you list them from 1-10, you realise that 20% of them give you 80% of results. The other 80% give you 20%.

Theory of Rents

Rents or benefits should be paid for ownership of assets rather than their contribution to any actual production.

Rent-seeking is the money you get from the assets because you own it, not because you actually work for it. You don’t have to work any hours, but you still get the money for it.

This is particularly bad, as an economic concept.

For example, MC gets a job as a teacher but doesn’t teach anything. He doesn’t deserve the money. The same thing happens to a dentist. The dentist hands you the tools, but doesn’t do anything.

This is the point of this theory.

“How do you deserve this money without doing anything?”

Rent says that you do not need to do anything to make money.

Rent-seeking

When we try to get more money by doing absolutely nothing.

You don’t do anything extra, but you ask for more.

E.g.

Lobbying/unions Comes together to ask for better wages/salary Why should we pay someone for doing the same thing year-in-year-out?? Annual leave We get paid for not doing anything, taking a break, etc. Donations You donate $500, and the government pays you $250 back Corn Laws (1815-1846)

They put tariffs and other trade restrictions on imported food and corn in the UK, keeping corn prices high to favour domestic producers and represent British mercantilism.

Britain decided to adopt a whole new set of protections in the form of the corn laws, where they would try to help the domestic producers by upping the price of foreign products.

Karl Marx

Karl Marx lived after the Russian Revolution, which had the Russian Empire collapse due to the horrible treatment of the workers.

He was a German economist, and was the 1848 “communist Manifesto,” and focused on the struggle between capitalists and the working class, as he was greatly influenced by this Revolution.

He examined the effect of capitalism on labour, productivity, and eocnomic development and argues for a worker revolution to overturn capitalism in favour of communism.

Marx was also an avid supporter of socialism.

He believed that labourers have little power in the capitalist economic system, which exploited low wages to maximise profit.

Karl Marx saw class struggle at the heart of capitalism, and predicted that their struggle would ultimately destroy capitalism.

Communism - the government knows everything about everyone, and thus allocates the money to everyone based on what the government believes they need.

Socialism

The money of everyone should be combined and allocate the earned money equally among everyone. John Maynard Keynes

British, came up with his idea in 1936 about economic intervention policies (government expenditure).

He believed that the government should increase expenditure, lower taxes to stimulate demand, and pull the global economy out of depression.

Macroeconomic theory of total spending in the economy and its effect on output, employment, and inflation.

His idea surfaced in the Great Depression, believing the way out was governments to start spending in order to put money into private sector pockets and get demand for goods and services to increase.

Adam Smith’s Influence

Karl Marx was inspired to create socialism and communism, as he disagreed with Adam Smith’s position on capitalism.

John Maynard Keynes opposed Adam Smith’s idea that there should be minimal government interference in the market, and proposed that the government spend more money during a recession to help the economy.

David Ricardo built upon Adam Smith’s idea of free trade, developing his theory of comparative and absolute advantage.

Planned economies: governments plan everything.

Free market: governments don’t have any control over the market.

Classical Economics Classical Economics was thought to be first established by Adam Smith, as he’s often referred to as the father of classical economics. This economic theory includes many broad theories, including theories of the free market, demand, supply, distribution, value, and price.

Although there are disputes on what classical economics actually is, most can agree that free trade and competition between consumers and producers were a foundation.

This school of thought emphasised individuals’ achievements over their wealth or status, favouring meritocracy over hierarchy and class-structure.

https://www.investopedia.com/terms/c/classicaleconomics.asp

Classical economics further argues that government interference is not necessary, in that the free market is self-regulating. It believes that employment and efficiency will always be used at their maximum, which we know is sometimes untrue.

https://study.com/academy/lesson/the-keynesian-model-and-the-classical-model-of-the-economy.html#:~:text=The Classical Model says that,and prices can get stuck.

Keynesian Economics Keynesian Economics is essentially the opposite of supply-side economics, and instead believes that it is demand that drives supply. This theory seems to be similar to Classical Economics, however, while classical economics believes governments should play little role in the economy, Keynesian Economics believes that governments should play a somewhat major role.

It believes that total spending in an economy effects its output, employment, and inflation rates. It also supports the idea that governments should create policies to manage aggregate demand in order to address or prevent economic recessions.

https://www.investopedia.com/terms/k/keynesianeconomics.asp

Keynesians believe that prices and wages are somewhat rigid, and that changes in other components of spending would lead to an increase in output. These other components of spending can include consumption, investment, or government expenditure.

If government spending increases, for example, and all other components of spending remain constant, then output will increase.

They support the idea that wages and prices have less fluidity, and take far more time to change, taking more time to respond in changes in supply and demand. This would result in periodic shortages and surpluses, especially of labour.

https://www.econlib.org/library/Enc/KeynesianEconomics.html

Supply-Side Economics Supply-Side Economics was a theory made by Arthur Laffer in the 1940’s, and basically argues that the increase of the supply of goods and services is the driving force of economic growth.

This type of economics also advocates for tax cuts as a way of encouraging more people to work and produce goods.

https://www.britannica.com/money/supply-side-economics

This type of economics seems to favour the wealthy, as the proposed tax cuts are only something for the wealthy. This is so that the rich have increased savings and investment capacities, which leads to benefits for the whole economy (eventually).

They believe that this money will lead to the production of an excess of goods, which will lead to a decrease in price, resulting in consumers buying more.

Supply-Siders also believe that the government interferes with the economy through printing too much money…

https://www.investopedia.com/articles/05/011805.asp#:~:text=our editorial policies-,What Is Supply-Side Economics%3F,business expansion%2C and entrepreneurial activity.

Monetarism Monetarism is theory stating that governments can foster economic stability by targeting the growth rate of the money supply.

It believes that the total amount of money in an economy is the primary determinant of economic growth. It also suggests that the supply of money in an economy is the primary driver of economic growth.

This increase in the amount of money in circulation would then lead to demand for goods and services rising, encouraging job creation, which reduces the unemployment rate and stimulates economic growth.

The amount of money in supply is then regulated by monetary policies, by adjusting interest rates. When these rates are increased, people have a higher incentive to save rather than spend, decreasing money supply.

On the other hand, when interest rates are lowered, the cost of borrowing decreases, meaning people can borrow more and spend more, thereby stimulating the economy.

https://www.investopedia.com/terms/m/monetarism.asp#:~:text=Monetarism is a macroeconomic theory,primary determinant of economic growth.

Monetary Policy: policies put in place that influence taxation, inflation, unemployment, etc. Usually in the form of interest rates.

Fiscal Policy: government spending and taxation

Economic Systems

Refers to the way an economy organises itself to address the basic economic problem.

The function of an economic system is to decide how to address the BEP by answering the four questions:

What to produce How much to produce How to produce For whom to produce for Thus, the government control used to solve the problem depends on the type of economic system:

Free market Planned (command economy) Mixed (modified market) As such, the economic system is a type of social system. All economic systems exist to answer the four basic questions: what to produce, how to produce it, how much to produce, and who receives the output of production.

Today, the dominant form of economic organisation at the world level is based on market-oriented mixed economies.

In fact, in all of history, no economy has been singularly command, or market economy.

Most societies in the modern world have elements of all three economies, making them mixed economies.

Capitalism requires a market economy to set prices and distribute goods and services. Socialism and communism requires a command economy to create a central plan that guides economic decisions.

However in the end, all economies will turn to capitalism.

Planned/Command Economy:

A system where all decisions (the four questions) are made by the government. Either the government of a collective owns the land and the means of production.

It doesn’t rely on the laws of supply and demand that operate in a market economy. In recent years, many centrally-planned economies began adding aspects of the market economy.

Here, money shouldn’t exist. You only get what you need (or what the government thinks you need) We actually see more and more progression from moving to capitalism The resultant mixed economy better achieves their goals.

The government creates a central economic plan setting economic and societal goals for every sector and region of the country.

The government allocates all resources according to this central plan. It tries to use the nation’s capital, labour, and natural resources in the most efficient way possible.

It promises to use each person’s skills and abilities to their highest capacity seeking to eliminate unemployment.

The planned economy has a central plan that sets the priorities for the production of all goods and services, including quotas and price controls. It’s goal is to meet the needs of everyone in the country (food, housing, and other basics).

The government decides you cannot set the price for a certain object lower than this. It usually is set much higher than what consumers will pay (price floor). Price ceilings are products that are set lower than what the people want to pay for. This means that the producers are making a loss (some examples include vegetables). It also sets national priorities which include mobilising for war or generating robust economic growth.

This type of economy works best during wartime. However, whether it works during peace time is a bit different.

The government owns monopoly businesses. Monopoly businesses are industries deemed essential to the goals of the economy, and usually includes finance, utilities, and automotive.

There is no domestic competition in these sectors.

The government enforces this through the creation of laws, regulations, and directives. This means that businesses must follow the plan’s production and hiring targets, without being able to react to a rise in supply, rise in demand, etc.

Prices have no meaning as they can’t dictate anything. Businesses cannot respond on their own to free market forces. This economy is also a key feature of any communist society.

Cuba, North Korea, and the former Soviet Union are examples of countries that have command economies. China maintained a command economy or decades before transitioning to a mixed economy that features both communistic and capitalistic elements.

It has opened up to international trade, and has gained some benefits of a market economy. Market Economy:

A system where the market is allowed to make decisions regarding the questions addressing the BEP (basic economic problem).

A system where the laws of supply and demand direct the production of goods and services. Supply includes natural resources (land, capital, labour, enterprise: the factors of production.

Businesses (everyone) sells whatever they produce at the highest price that consumers will pay. For example, education. Let’s say Mr Cao charges $20,000—the highest price consumers will pay.

There is also no charity here in a market economy.

At the same time, shoppers will look for the lowest price for the goods and services they want. Brand wouldn’t matter—only the lowest prices.

Workers bid their services at the highest possible wages that their skills allow.

Employers seek to get the best employees at the lowest possible price, to lower cost of production, encouraging slavery.

Examples:

The UK provides basic needs alike healthcare to everyone regardless of their time or effort at work. However in the US, welfare and the public education system are a form of socialism. Their healthcare isn’t universal, and there are conditions to this free healthcare. In terms of private property, Russia (most communist according to everyone) has private property, but Singapore, Vietnam, Hong Kong, all do not (these three all advertise themselves as not communist) The 6 Characteristics of the Market Economy

Private Property

Most goods and services are privately owned.

Owners of these goods and services can make contracts to buy, sell, or lease their property. In other words, their assets give them the right to ownership.

If someone loans someone else a tool for example, the product that the tool makes and the profit from this product can then be given to the one who owns the tool.

Freedom of Choice

Owners are free to sell, produce, or purchase goods and services in a competitive market. There are only two constraints to this:

The price at which they’re willing to buy or sell. The amount of capital they have. Motive of Self-Interest

Everyone has their own interest at hand. Wares are sold to the highest bidder, who in turn tries to negotiate the lowest price for their purchases.

Although this reason is selfish, it benefits the economy over the long run, as it sets prices for goods and services that reflect their market value, giving an accurate picture of supply and demand at any given moment.

Competition

The force of competitive pressure keeps prices low, while ensuring that society provides goods and services most efficiently.

As soon as demand increases for a product, prices rise thanks to the law of demand.

Competitors see they can enhance their profit by producing it, adding to supply, and thus lowering prices to a level where only the best competitors remain.

System of Markets and Prices

The market economy relies on an efficient market in which to sell goods and services. This is where all buyers and sellers have access to the same information.

Unfortunately here in Australia, sellers have far more information than the buyers do. They have more power than we do Price changes are pure reflections of the law of supply and demand.

Government Involvement

Mixed Economy:

An economy with components of both a command economy and a market economy. The government may make some decisions, while markets may make other decisions.

It’s a system that combines characteristics of market, command, and traditional economies, benefiting from the advantages of all three will suffering from a few of the disadvantages.

Has three characteristics:

Protects private property. Allows the free market and the laws of supply and demand to determine prices. Is driven by the motivation of the self-interest of individuals. Private property:

The government’s role in the economy depends on the priorities of the citizens. Sometimes the government may create a central plan that guides the economy, while other economies allow the government to own key industries.

These include aerospace, energy production, and even banking.

The government may also manage health care, welfare, and retirement groups.

Economic Systems - Types Socialism means you can give your leave days to someone else!! It’s quite nice in theory. However this also means that people can take what you need, even from other people’s houses and such.

The main idea is that economies varies, and the type of economy we have reflects our goals.

What’s interesting to point out is that the spending of 4 private schools on infrastructure is greater than the amount of spending the government spends on school infrastructure. Fascinating.

Capitalism

An economic system where means of production like factories, equipment, etc., are privately owned rather than controlled by the government. This is where 42 people hold the same wealth as 3.7 billion of the poorest people.

However, there are different forms of capitalism:

Laissez-faire Idea that the free market through supply and demand, will regulate itself if the government doesn’t interfere Government should be “hands off” with big business For example, the Rise of Industry We allow big businesses to do anything and everything they can to make as much money as possible. This is HORRIBLE. Strengths Spread of power.

If the government owns 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. Usually, when the government intervenes too much into something, it fails.

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.

Firms have a reason to make their products better.

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 more popular with consumers, which can lead to product development and more choices in goods.

They have to innovate to compete.

Economic Growth.

Creates better living standards. With firms and individuals facing incentives to be innovative and work hard creates a climate of innovation and economic expansion, helping to increase real GDP and lead to improved living standards.

Big GDP does not equal to better living standards. We can see this in the pandemic, through the construction works everywhere—the government was spending money to facilitate the economy.

Weaknesses Monopoly Power.

Private ownership of capital enables firms to gain monopoly power in product and labour market. Capitalist countries are very susceptible to these monopolies and duopolies (Coles and Woolies), allowing them to exploit their position to charge higher prices.

Social Benefit Ignored.

A free market will ignore externalities. A profit-maximising capitalist firm is likely to ignore negative externalities, such as pollution from production, which can harm living standards. But these markets don’t care.

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.

These firms and such will always ask “how does this benefit me,” “how can I profit from this,” etc.

Inherited Wealth and Wealth Inequality—Social Division

This leads to people having so much money that they can do whatever they want, resulting in a huge wealth disparity and social classes.

A capitalist society is based on the legal right to private property and the ability to pass wealth onto future generations.

Capitalists

Socialism A political economic theory that advocates for the rights of the working class. It stems from the idea that power belongs to the working class. Examples include China, Yugoslavia (parts of the USSR).

Strengths Reduction of Relative Poverty

A welfare state which provides a minimum basic income for those who are unemployed, sick, or unable to work, maintaining a basic living standard for the poorest in society and helps to reduce relative poverty.

In other words, if everyone is poor (everyone is equal), then we can all work together. Make everyone equally poor, sad, etc.

Free Healthcare

Free healthcare at the point of use means everyone is entitled to basic healthcare, increasing standard of living for those who cannot afford to pay private doctors. By improving the nation’s health, it also contributes towards increased labour productivity and higher economic growth in the long-term.

In Cuba, you can walk into a hospital and get free healthcare there.

In the US, there is no universal healthcare and uninsured workers can slip through the net and either not be entitled to health care or go bankrupt trying to pay bills.

A More Equal Society is More Cohesive

A society which has equality of opportunity and limited inequality is likely to be more cohesive.

Encourages Selflessness Rather than Selfishness

A socialist society does not pursue profit as its highest goal, but social cohesion and the common good.

Weaknesses Lack of Incentives

If everyone is given the bare minimum of life, then no one has any incentive to work. If an economy has high rates of progressive taxation, it could set up disincentives to work or set up a business. Entrepreneurs may feel that if the government is taking a high percentage of their profits, they would prefer not to take the risk, or may even work abroad.

Government Failure

In an ideal world, the government would be successful in regulating firms, labour markets, and running public industries.

However, government intervention is prone to government failure and an inefficient allocation of resources. If firms are highly regulated, it is an extra cost which may discourage investment and lead to lower economic growth.

Government intervention will never offer an efficient allocation of resources.

Communism An economic or political system in which the state or the community owns all property and the means of production, and all citizens share the wealth. Theoretically, there is no class.

Countries include: Cuba, North Korea, and Vietnam

Communism is the idea where everyone owns the wealth of everyone else (I like ur laptop, it’s mine now. No one owns anything, meaning you can take anything from anyone).

Strengths Centrally Planned Economy

It can quickly mobilise economic resources on a large scale, executing massive projects and creating industrial power. It can move so much more effectively since it doesn’t have any self-interest, and subjugates the welfare of the general public to achieve critical social goals.

Equality

It offers equality on the level that capitalism can never offer. The idea of communism is that capitalist societies will eventually crumble because the weight of wealth on top of the poor will eventually cause the system to become top-heavy.

Allows for Employment Opportunities

Employment opportunities would be given to everyone. Anyone who wants a job will be given one under a capitalist society. If you don’t want to work, then you must support your community in some other way.

The state determines where your work is.

Weaknesses Government Owns Everything

The government owns everything, including property, businesses, and production means. The most significant disadvantage of communism is the fact that it eliminates the free market from domestic society—there are no laws of supply and demand available to set the prices for consumers to pay.

Because of this disadvantage, it is not unusual fro the government to produce at surplus’ and shortages.

Black Market

A free market doesn’t exist under this structure, so citizens will setup black markets to help them trade the items they want or need that are not part of the planner’s provisions, destroying the trust that is found in the pure vision of communism.

Communism looks at each person as a resource, provides them a common set of basic essentials, and then expects compliance under the threat of further freedom restrictions.

There’s no trust in communism. People don’t trust the system, and the system doesn’t trust the people either.