Economic Systems & The Business Cycle

Sept 9 • Hmwrk: The Business Cycle Wrksht Ques

• Objective (same as 9/6 – Fri) – Identify & explain the different market structures in the

American economy, and

– Explain why businessmen in the industrialized Gilded Age used these different market structures by completing notes and business cycle activity

• Agenda: – Review Economic & Political Systems – Take out

homework : Comparing Worksheet

– C-Notes – Economic Systems & The Business Cycle

– Organize Folders

• Do Now: What’s the difference between a Democracy, Republic & Oligarchy?

Clarifying Political & Economic Systems

What Role Should Gov’t Have?

• Take out your “Comparing – Political v. Economic Systems”

– Review: Gov’t Systems & Economic Systems

– Basic component is the understanding that both systems based on answering the question, “what role should government have in individual lives”

What’s the Difference?

• Common names for the forms of government/economic systems that we are used to

– Capitalism

– Socialism

– Communism

Capitalism

• Capital (or the "means of production") is owned, operated, and traded for the purpose of generating profits for private owners or shareholders. Emphasis on individual profit rather than on workers or society as a whole.

– Laissez-faire

– An economic system based on "survival of the fittest". (Social Darwinism)

Capitalism

• Government best for this system? – Democracy

• Economic system capitalism is based on? – Free Market

• Examples: USA is the closets example, but not exactly; no true capitalist society exists – WHY?

• Free Market means government only gets involved to protect or grow the economy, not to regulate

Plusses & Minuses of Capitalism

• Plusses

– competitive and free markets,

– voluntary exchange of labor or goods

• Minus

– unfair and inefficient distribution of wealth and power;

– a tendency toward market monopoly or oligopoly (and government by oligarchy)

Socialism

• From each according to his ability, to each according to his contribution. Emphasis on profit being distributed among the society or workforce in addition to receiving a wage. – All people have an equal opportunity to succeed. – Workers should have most say in their factory's

management. – Government regulation is necessary to prevent

abuses. – system based on "you get a share regardless of your

contribution".

Socialism

• Government system best for this system? – Republic, Oligarchy

• Economic system capitalism is based on? – Mixed & Command

• Examples: Canada, Great Britain, Australia, Germany, China – What’s the difference between these countries?

• The amount of government involvement will determine how much government control in the economy

Plusses & Minuses for Socialism

• Plusses – Degree to which gov’t is involved is determined by

the people

– Eliminates the abuses of capitalism

• Minuses – it’s inefficient or incompatible with individual

rights

– No price mechanism (where supply & demand meet) because controlled by government

– May reduce prosperity for all

Communism Theory

• An economic system based on "you put in your fair share; you get your fair share".

– “Spirit of sharing” common goals and agreed upon rules/laws to allocate responsibilities and resources.

Communism Theory

• Government system best for this system?

– Democracy

• Economic system capitalism is based on?

– Mixed & Command

• Examples: There are none that exist

Plusses & Minuses

• Plusses

– Incentive to participate: those that participate benefit and those that don't, don’t get

– Efficient at distributing resources within their localized areas - particularly in times of need

• Minuses

– Large, diverse societies (big geography & many different people) can’t agree on what to produce, how to produce, and who to produce for

Economic Terms

• Law of Supply: As prices increase, businesses are willing to sell more = supply increases

• Law of Demand = Prices decrease, consumers want to buy more = increase in demand

• Equilibrium – Where supply and demand meet = price is set

Boom: Confidence: Spending: Income: Unemployment: Inflation: Investment:

Recession: Confidence: Spending: Income: Unemployment: Inflation: Investment:

Slump: Confidence: Spending: Income: Unemployment: Inflation: Investment:

Recovery: Confidence: Spending: Income: Unemployment: Inflation: Investment:

Business Cycle

Boom: Confidence: optimistic Spending: high (high borrowing, low saving) Income: high Unemployment: low, skills shortage Inflation: high Investment: high, firms expanding

Recession: Confidence: falling Spending: falling (less borrowing, more saving) Income: falling Unemployment: starting to rise Inflation: falling Investment: only essential investment

Slump: Confidence: pessimistic Spending: low, paying off debts instead Income: low Unemployment: high, skills surplus Inflation: stable, v/ low, maybe deflation Investment: none

Recovery: Confidence: rising Spending: increasing Income: slowly rising Unemployment: slowly falling (remember usually a LAG indicator) Inflation: stable, slight rises Investment: only essential

Business Cycle

SLUMP

RECOVERY

BOOM

RECESSION