Utopia – › utopia means “no place” in Greek – for

good reason in real world, scarcity is a fact of life

3 Key questions:› 1. › 2. › 3.

Answers shape an economic system

Is the way a society uses its scarce resources to satisfy its people’s unlimited wants

3 basic types of economies› 1. › 2. › 3.

System in which The one goal of the society is survival The good of the group takes

precedence over individual desires Everyone in the society has a set role –

men, women, and children 

The govt. decides Govt. officials consider the resources

and needs of the country and allocate according to their judgment

Wants of the individual are rarely considered

Govt. usually› eg. – North Korea and Cuba

Is based on individual choice, not govt. directives

Consumers and producers drive the economy Consumers – Producers – Make choices about limited resources to

make most money possible Individuals act in own self-interest, but also

benefit others› a consumer choice benefits a producer because

they earn money from purchase› lending an invisible hand to promote the interests

of others

-earliest times – all societies had this – but inefficient and do not adapt to change

Advantage – › produces what best ensures survival› methods of production are the same as they

always have been› system of distribution are determined by

custom and tradition

Disadvantage› resist change› less productive then if adopting new

approaches› defined roles eliminate conflict –

people in wrong job are less productive lower productivity means people do not acquire

material wealth people have lower standards of living

Traditional economies under pressure to change

Kavango people in Namibia, Africa – subsistence farmers› see images of world outside their land › the young than want more from life and

leave the villages› some people have changed to commercial

farming

Leaders decide what and how it should be produced› also for whom it should be produced by

setting wages› by setting wages, you decide who can buy

what products Centrally planned economy –

How govt. affects us:› work – › states – › local law –

Suppose:› bureaucrats could decide which business can

operate in your town› also decide what should be produced, how

much should be produced each month, also who can have jobs and their hours and pay scale

Modern societies with command economies influenced by Karl Marx› Marx –

struggle between factory owners and workers

owners get rich, workers stay poor predicts workers overthrow owners and put

factories into public hands class struggle over and all share in wealth

– economic system in which the govt. owns some or all of the factors of production

– more extreme form of socialism, no private ownership of property and little or no political freedom

– requires absolute obedience to authority

– established through democratic political process – no violent overthrow› govt. owns the basic industries, other

industries are privately owned› decisions made for govt. industries, maybe

for some other sectors – health care

Marx born in 1818 Germany, middle class family› exiled from country due to radical political

beliefs Settled in London, met Friedrich Engels

(son of factory owner)› learned of the struggled of the worker –

took up study of economics› Ind. Rev. had created system of wage

slavery

Said factory owner treated workers as another commodity to be bought› use labor to make products› make a profit by selling products at higher

price than cost of labor and resources› keep wages low and make more profit› exploitation of the worker

Rising tension between owners and workers inevitable› over time, more wealth in fewer hand,

more dissatisfied workers – revolt 1848 – Further discussion in his study –

Because of the way communism worked in practice and the fall of communism in early 1990s, his ideas have fallen into disfavor – but still had a huge impact on economic and political thinking

No pure command economies today

North Korea – mostly command economy

Split after Korean War – Govt. controlled all economic decision –

› diverted most resources to military – late 1990’s and early 2000’s many die from hunger & malnutrition due to lack of food

› many survive because of food aid from other countries

Failure to provide food and other products is the result of a flawed economic plan› much of 1990s, NK produced less and less –

economy shrunk› since 2003 – relaxing of restrictions on private

ownership and market activity

Provide for everyone (sick and old)

Can produce items that may not make money in market economy (medicines)

Central planners have little understanding of local conditions

Decisions often misguided or wrong› workers have little

motive to improve productivity (paid the same no matter what)

› no motivation to use resources wisely (no private property)

Often set prices below that of a market system› shortages – › light bulbs in

factories

Greatest failure – › individual rights are

subordinate to the needs of the state – even right to life

› millions die on collective farms in China and Soviet Union

› command economies responsible for death of more people than 2 world wars

Several distinct characteristics› from self-interest

Private property rights – Property –

› factories, offices, house, car, intellectual property (songs, ideas)

Market – › farmers market, internet

For markets to work efficiently, private property rights need to be well defined and actively enforced

Need to be sure that the seller owns or has the right to be selling said product

Some govt. role is to stay out of the marketplace

Laissez faire – › principle that govt. should not interfere in the

economy› often paired with capitalism

Capitalism – › foundation for market economies› operate on idea that producer will create goods

and services that consumers demand Laissez faire capitalism –

› market economy in pure form No pure market economies – real world –

some level of govt. involvement

Voluntary exchange – a trade in which the parties involved anticipate that the benefits will outweigh the costs› believe what they are getting is worth

more than what they are giving up Market economy – most trade is based

on exchange of a product for money› self-interest guides voluntary exchange

Profit – a financial gain from a business transaction

Competition – the effort of two or more people, acting independently, to get the business of other by offering the best deal› similar products – decide which based on whatever

combination of price and value appeal to you Consumer sovereignty – is the idea that because

consumers are free to purchase what they want and to refuse products they do not want, they have the ultimate control over what is produced› no competition – brand name produces charge higher prices› competition – acts as a control on self-interested behavior,

guiding the market toward › a balance between higher value and lower prices

producer must work to please the consumer while pleasing themselves

Specialization – › trade what they can most efficiently

produce for goods and services produced more efficiently by others

› removes need for households to be self-sufficient

› markets allow households to trade

Circular flow model – › represents 2 major decision makers in a

market economy households businesses

› show 2 markets where households and businesses meet that for goods and services that for resources

Product market – › a set of activities› whenever or wherever individuals purchases

goods or services› suppliers of product market are business –

offer goods/services for money – money › keep business going

Factor market – › individuals own all the factors – some

directly, some indirectly (stockholders)› businesses are customers and individuals are

producers

use figure 2.4 to illustrate› green arrows – flow of money in the

product market› blue arrows – flow of resources and

products in the product market

Advantages

Nov. 9, 1989 Berlin Wall fell and thousands of E. Germans came to the west, why?

Economic and Political Freedom› freedom – chief advantage› requires that individuals be free

to make own economic choices – determines what will be produced

Also free to develop interests and talents in work produced

Political process is much freer› diversity of viewpoints and open elections› bureaucracy less cumbersome and costly› responsive to change and can accommodate change

Individuals in local communities free to make their own economic choices w/o govt. interference› better knowledge of area leads to better econ. decisions

and greater productivity Profit –

› serves as reward for hard work and innovation› more good ideas equal more money

Encourages competition – consumers have final say› higher quality products at lower prices› helps create a diverse product market

Pure market economy – No mechanisms for providing public goods

and services – would not be profitable Cannot provide security to those who cannot

be economically productive Cannot prevent the unequal distribution of

wealth› ex. Econ boom of 1800s to 1900s in the US› a few became very rich – workers had low pay› industrialized societies adopt some form of govt.

involvement› mix elements of command and market

Farm family in Midwest US› harvest time custom – › roads, public high school, minimum wage,

Social Security checks – › private property, entrepreneurship of

family, competitive market, voluntary exchange labor for wages –

All economies are mixed, but often emphasize one type of system › US economy – market dominant› many European countries – more even mix

of market and command

Sweden –

-govt. & govt. related organizations own about 1/3 of all companies

-cradle to grave social benefits

-child care, schooling through college, health care, dental, paid time off to raise families, old age pension

France – › govt. ownership of core

industries› 1980s – dissatisfaction –

privatized industries (banking & insurance)

› controlling interest in other industries – energy, auto, defense, transportation

› provides social services – health care and education

Namibia – › since 1990s – encouraging

a more market driven approach

-economies have changed, and are always changing in response to changes in natural, social, and political conditions

Nationalize – › after WWII – many govt. became more

centrally planned – nationalized industries – coal, steel

Privatize – › recently – economies moving away from

command systems› Poland – from command to market› since 1990s – privatized manufacturing,

construction, trade, service› hope private would provide incentives for

greater efficiency – economy grow

One way to privatize – open to foreign investors Global economy –

› America – actors in a world economy› more foreign trade than ever before› depend on foreign products and foreign markets which sell products

reason for economic globalization› opening up of world markets to trade› agreements between nations so trade flows smooth and free› development of faster, safer, cheaper transportation

goods moved around the world inexpensively› telephone and computer linkages make financial transactions quick,

cheap and easy› enhanced cross-border relationships – US & Japan – Ford & Mazda

Shared efforts leads to greater efficiency - lower production costs and higher profit

Partnerships grow out of need to share costs of researching and developing new tech.