[Music] Hey guys, I'm going to start today's discussion with a question. A single day economics class is being offered at UCI for high school seniors. This class is taught by a Nobel Prize winner in economics and attending this class will virtually guarantee your admission to any college of your choice. There are only 12 seats available and everyone who takes AP economics at Esparonza High School is invited. What are five different ways that we decide who gets a seat in this class? Think about it. Any five ways? Right away, off the top of my head, I think about highest GPA, students who will major in economics, and a random lottery. But there are lots of other ways to decide this question. For example, you see, I could decide who goes. the first 12 people to volunteer. Maybe we sell the seats to the highest bidder. Or maybe I, Mr. Willis, gets to decide who goes. Each of these five ways to determine who gets to go to this class has different criteria by which the decision is made. In allowing students with the 12 highest GPA to go, we're allowing competition to decide for us. By allowing me to decide who goes, one person holds the power to decide for everyone involved. Even deciding by random lottery adds an element of chance or luck. This brings me to today's topic which are economic systems. An economic system is a mechanism used by a society to determine how to best allocate scarce resources. These various economic systems help to answer the three essential economic questions of what to produce, how should we produce it, and for whom should it be produced? And it will answer these three essential economic questions based on social values and goals. In other words, what does society want and what is it looking to achieve? Today we're going to take a quick look at the three most common economic systems around the world. They are the free market, also known as the market economy, the centrally planned economy, also known as the command economy, and the mixed economy, also known as the Keynesian economy. Let's start with the free market. Advocated by the economist Adam Smith, the free market economy operates on its own through competition and consumer purchasing without government interference. This is a concept known as lazair economics. Here's how it works. Firms produce goods and services that consumers need and want the most. Consumers will buy these products in order to maximize their own utility, but at the same time, firms must produce quality goods to compete for profits and survive in the marketplace. Everyone operates through their own self-interest and by doing so meet the needs of society through market interaction. This is what's known as the invisible hand. The rebels hidden fortune. No, not that invisible hand. Not that invisible hand either. We're talking about this invisible hand. The invisible hand are natural market forces that allow the market to control itself. If something goes wrong, the invisible hand fixes it and puts the market back on track. The key to a pure free market economy is no government interference. It's consumers and firms interacting freely and maximizing their incentives. In the market economy, consumers act to satisfy their utility by buying products they want or need. This helps to answer the question of what goods and services to produce. Consumers tell firms what to produce by signaling to them in the market what to make and what not to make based on their demand. Firms act to satisfy their profit motive by producing products at a minimal cost. This helps to answer the question of how to produce goods and services. By seeking to maximize profit, firms will go through the production process and seek to minimize cost with the least amount of waste. The invisible hand or natural market forces will answer the question for whom goods and services are produced. Through supply and demand and price and quantity fluctuation, consumers who can afford goods and services and get their hands on them will be the ones who receive those goods and services. Natural market fluctuations can cause changes in prices and quantity and therefore changes in who receives goods and services overall. While laser economics does dictate that government should not involve itself in the economy, it does have one role to serve. Government seeks to protect property rights. By doing so, it can guarantee fair competition in the marketplace. Your property rights are guaranteed in the Bill of Rights in the Constitution. Think about it. You have a right to do what you want with your property. That includes physical and intellectual property as well as your time and your labor. No one tells you where to work. You decide for yourself what you will become in your career. You're also able to protect your ideas through patents and copyrights. Our second economic system is the centrally planned economy. Advocated by economist Karl Marx, the centrally planned economic system is where the market operates under the centralized planning of the government with all decisions under government control. In most cases, a command economy will exist in a [Music] dictatorship empire where one central figure or a small committee will make all political and economic decisions for society. Here's how it works. The government owns and controls all resources and production. The government therefore decides social needs. Everything that has transpired has done so according to my desire. And as a result, they will choose how to allocate scarce resources in order to optimize the general welfare of [Music] citizens. Let's use some examples. In North Korea, Kim Jong-un makes all economic decisions. His priorities are to use North Korea's scarce resources to build up military strength as a show of force on the world stage. Meanwhile, he's left very little resources left for the basic needs of his people. So, he's going to allocate scarce resources to make weapons and his people starve. How about the Hunger Games? Penm is actually essentially planned economy where President Snow makes all decisions for society. Each of the districts has a specialized product that they will produce. That product will be shipped to the capital and the capital will determine what products will go where. As retribution for rebellion, those who live in the capital get to enjoy the luxuries of life while most of those who live outside the capital struggle to survive. But hey, may the odds be ever in your favor. This world map shows the distribution of economic systems around the world. As you can see, the more free market-based economies are concentrated in the more industrialized areas of the world, while the command economies are concentrated in less developed countries that tend to have more political corruption. But here is an interesting fact. No economy in the world is purely free market or purely centrally planned. So why is that? Regardless of what people believe about these economic systems, there is one inevitability. Both of these systems will fail. So how do these systems fail? The first type of market failure is what we call productive inefficiencies. Productive inefficiencies occur when markets waste scarce resources by producing products at higher than necessary costs. We can see an example of this today in the American health insurance industry. Healthcare fees are rising at an astronomical rate, but it has nothing to do with demand. In fact, on average, we demand health services very rarely. Instead, it has to do with the high costs of production. With health insurance controlled by a few large firms, many resources are wasted due to a lack of competition. There's no real pressure to bring down costs because there's no one to compete with. This is why an ambulance ride or a hospital bed is so expensive. As a result, your premiums are higher and healthcare costs are inflated. The second type of market failure is allocative inefficiencies. This is when the market fails to produce what society needs and wants the most or doesn't produce enough of it. Think about it. In any free market system, how would it be profitable for firms to provide vaccinations or military goods, police services, or a fire department or even education? There isn't a lot of profit to be made in any of these services. And as a result, no firm will take the risk of providing them in the marketplace. But yet, these goods and services are still needed by society. If left to the free market, the citizens would go without these goods and services and not have basic needs and wants met. There has to be a solution. The answer is the mixed economic system. Advocated by economist John Maynard Kanes. The mixed economic system is where the free market, also known as the private sector, and the government, also known as the public sector, work together in order to meet social needs. If the private sector were House Targaryen and the public sector were House Stark, then the mixed economy would be Jon Snow. God, Game of Thrones is so good. Here's how it works. Through free enterprise, consumers and firms mutually benefit in the markets. The free market system works as is, but the moment the market fails in some way, government intervenes in order to fix the failure. For example, if the country needs to go to war and there's no military to help defend the citizenry because no firms have provided that military, government will step in and produce the military needed. Ideally, both firms and government work together towards the goal of socioeconomic growth and the satisfaction of citizens needs. The United States economy since the creation of the republic has been mixed. The Continental Army was raised by the government. The founding fathers early on adopted the mixed economic system and we've used it ever since. The mixed economic system is by far the most common economic system around the world today. Macroeconomics is the study of mixed economies. And so this is the economic system we will focus on the most in this course. Okay, it's time for a quick review of today's major points. An economic system is a mechanism used by a society to determine how best to allocate scarce resources. It helps to answer the questions of what to make, how to make it, and for whom it is made. Each of these decisions is made based on social values and goals. The most common economic systems are the free market system where lay a fair economics rules and the invisible hand or natural market forces answers essential economic questions. The centrally planned economy where government owns all resources and production and will answer the three questions for the people. But of course, both these markets will inevitably fail and so the third system can be used known as the mixed economy where the private sector and the public sector where government and the free market will work together to meet the needs of citizens. Thanks for joining me today. We'll see you next time on Intro to Econ.