CHAPTER 2ECONOMIC SYSTEMS

SECTION 1: ANSWERING THE ECONOMIC QUESTIONS

• Objectives: • Identify the key economic questions that all societies must answer.

• Analyze societal values that determine how a country answer the 3 economic questions.

• Define the characteristics of a traditional economy.

3 KEY ECONOMIC QUESTIONS

• What goods and services should be produced? • How should these goods and services be produced? • Who consumes these goods and services?

ECONOMIC SYSTEMS

• Economic systems: structure of methods and principles that a society uses to produce and distribute goods and services

• 5 minutes: What goods should we produce? How should we produce them? Who should come consume them? • Topic: Food

WHAT GOODS SHOULD WE PRODUCE? (FOOD)

HOW SHOULD WE PRODUCE THEM? (FOOD)

WHO SHOULD CONSUME THEM? (FOOD)

WHAT GOODS AND SERVICES SHOULD BE PRODUCED?

• Determined by society

HOW SHOULD GOODS AND SERVICES BE PRODUCED?

• Determined by society

• Determined by the factors of production

WHO CONSUMES GOODS AND SERVICES?

• Society • Factor payments: income people receive in return for supplying

factors of production • Profits

ECONOMIC GOALS AND VALUES

• 1. Economic Efficiency – uses factors of production the best way possible

• 2. Economic Freedom

• 3. Economic Security

• Safety nets – set of programs to protect people from unfavorable economic conditions

• 4. Economic Equity – dividing the economic pie

• 5. Economic Growth

• Standard of living – level of economic prosperity

• Innovation – new methods and ideas

Economic Goal orValue What to Produce? How to Produce It? Who Consumes What

Is Produced?

Efficiency The economyproduces goodsit can makeefficiently andtrades for others.

1. 2.

Freedom Businesses decidewhat to produce.

3. 4.

Security 5. 6. Some socialprograms, such asfood stamps andhousing subsidies,try to ensure thatpeople will beable to meet basicneeds.

Equity 7. Businesses payworkers what themarket will bear.

8.

Growth 9. 10. Rising consumerspending helps theeconomy grow.

WHAT ARE THE STRENGTHS AND WEAKNESSES OF THE US ECONOMY?

ESSAY

• All societies have goals for their economy, but they value they value these goals differently. Five important economic goals that all societies pursue to some degree are efficiency, freedom, security, equity, and growth. Others may include environmental protection or protecting national industries.

• Think about what goals are most important to you and rank them. Write an essay in which you explain why the United States economy should focus on the goals you identified as the most important. Think about how Americans would benefit in the economy emphasized the goal you think is most important. Think about the effect that promoting the top two or three goals would have on the economy. In your essay identify how the US may be meeting these goals, and what the country could do to improve upon them.

• Introduction (1), point/counter-point/point (2), closing (1)

• ATTENTION GRABBER, BACKGROUND INFORMATION, THESIS STATEMENT

HOW CAN INNOVATION LEAD TO ECONOMIC GROWTH?

R

Describe another technological innovation that lead to the creation of new goods and services.

THINK ABOUT IT. APPLY IT.

• A company has created a computerized robot that can triple the production of prepackaged foods. • Each robot can triple the production of prepackaged foods.

• Each robot can be operated by a single technician and takes the place of 10 workers.

• Use of the robot reduced the price of each can by 10%.

• The robots are operated by electricity.

• The increased production and sale of canned foods increases the amount of plastic garbage by 3%.

ECONOMIC GOALS AND SOCIETAL VALUES

• Look the list of economic goals and societal values. • Which society is best equipped to change and grow?

• In which society is it easiest to achieve economic equity?

• Which society offers individuals that most freedom to make their own economic decisions?

• Types of societies: Modern industrial or traditional

• Goals ad values: economic efficiency, economic freedom, economic security, economic equity, economic growth

HOW WOULD YOU REACT? WHY WOULD YOU REACT WAY?

• 1. Government economist

• 2. Factory owner

• 3. Skilled factory worker

• 4. Unskilled factory worker

• 5. Head of a labor union

• 6. President of a technical training school

• 7. Environmental activist

• 8. Head of a consumer organization

TRADITIONAL ECONOMY

• The oldest and simplest economic system

• Relies on habit, custom, and ritual

• Little room for innovation or change

• Revolves around the family unit

SECTION 2: THE FREE MARKET

• Objectives: • Explain why markets exist.

• Analyze a circular flow model of a free market economy.

• Describe the self-regulating nature of the marketplace.

• Identify the advanagtes of the free market economy.

• Write down 3 goods or services on a separate sheet of paper. • Tell me what they are. • Trade your goods and services for another good or service that

someone else has. • Is this a market?

WHY MARKETS EXIST

• Farmers market, malls, eBay etc. • Market: arrangement that allows buyers and sellers to

exchange things• Specialization – the concentration of the productive

efforts of individuals and businesses on a limited number of activities

FREE MARKET ECONOMY

• 3 economic questions are made by voluntary exchange

• Individuals and businesses make their own decisions

• Own the factors of production

• Make what they want

• Buy what they want

• Households - person or group of people living in a single residence

• Firms – an organization that uses resources to produce a product or service, which it then sells

• Factor Market – where firms purchase from households

• Product market – where households purchase from firms

FACTOR AND PRODUCT MARKETS

THE SELF-REGULATING NATURE OF THE MARKETPLACE • “Give me that which I want, and you

• shall have this which you want . . . . it is

• in this manner that we obtain from one

• another the far greater part of those good

• [services] which we stand in need of. 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.” —Adam Smith, The Wealth of Nations

THE SELF-REGULATING NATURE OF THE MARKETPLACE

• Self-interest

• Competition

• The invisible hand

THE ADVANTAGES OF THE FREE MARKET

• 1. Economic efficiency

• 2. Economic freedom

• 3. Economic growth

• 4. Additional goals • Consumer sovereignty – power of the consumer to decide what gets produced

Firm Resources Purchased in FactorMarket

Goods or Services Sold inProduct Market

Pizza shop Rent for spaceElectricity for cooking andlightingGasoline for deliveriesIngredients for foodWages for cooks

1.

Car manufacturer

Rent for factory and officesWages for workers2.

CarsTrucks

Health clinic 3. 4.

Hair salon 5. 6.

Computermanufacturer

7. 8.

SECTION 3: CENTRALLY PLANNED ECONOMIES

• Objectives: • Describe how a centrally planned economy is organized.

• Distinguish between socialism and communism.

• Analyze the use of central planning in the Soviet Union and China.

• Identify the disadvantages of a centrally planned economy..

CENTRAL PLANNING

• Government answers the 3 economic questions

• Government owns both land and capital

• Command economy – centrally planned economies • Direct contrast to free market systems

• “Closed lunches” at school

Buyer 1 - $50 Seller 1 - $50

Buyer 2 - $25 Seller 2 - $25

Buyer 3 - $10 Seller 3 - $10

Buyer 4 - $5 Seller 4 - $5

• You must buy supplies in order to draw a picture of your product

• Paper $2

• Pencil $1

• 5 colored pencils $10

• Colored paper $20

• Scissors $3

• Gluesticks $5

• Paint $20

• Paint brush $8

• The government orders that all video game designers must devote half of their time and resources to creating educational games. • Would a government of a nation with a free market issue such and order? Why or why

not?

COMMAND ECONOMIES

• EX: Uniforms for members of military vs. production of sweaters for consumers

• 1. The top planners decide that more military uniforms than sweaters will be made. They send this decision to the materials committee.

• 2. Knowing how much cotton is available, the materials committee decides how many uniforms and sweaters to produce. They send their decision to the makers of cotton, buttons, and elastic.

• 3. The cotton, the buttons, and the elastic arrive at the factories, where they are used to make uniforms and sweaters.

SOCIALISM AND COMMUNISM

• Socialism – a range of economic and political systems based on the belief that wealth should be distributed evenly throughout a society

• Communism – a political system in which the government owns and controls all resources and means of production and makes all economic decisions