Presentation on theme: "Chapter 2 – Economic Systems"— Presentation transcript:
1 Chapter 2 – Economic Systems Resources are scarce everywhere, thus:Every country must answer three economic questionsWhat goods and services should be produced?How should these goods and services be produced?Who consumes these goods and services?Economic System – the structure of methods and principles a society uses to produce and distribute goods and services.
3 Economic goals and societal values Every society pursue each goal to some degree:Economic Efficiency – maximize what can be producedcan’t be efficient unless you can provide the right goods to the right people at the right timeEconomic Freedom – the opportunity for individuals to make their own choicesEconomic Security – people want to know that goods/services are available when needed and that they will get paid on timeSafety net – governments programs like workman’s compensation, unemployment compensation, social security disability paymentsEconomic efficiency ex. – if people want laptop computers but a company keeps building desktops, is that an efficient use of capacity??? Must know what needs and wants of a society are.Economic freedom – the ability to choose what to buy from whom, what to make and how. Not all countries have this. Americans value this highly.Economic Security -
4 Economic goals and societal values Economic Equity – deciding who gets how much payment. Each society is different.Economic Growth – economy should grow with rising population and for individuals to have wage growthStandard of Living – level of economic prosperityInnovation – process of bringing new methods, products, or ideas into useInstrumental in economic growth i.e. industrial revolution, computer technology, etc.Goals in Conflict – some goals undermine others i.e. safety nets can slow economic growth because they are expensive
5 Types of Economies Traditional Economy Oldest and simplest economic systemRelies on habit, custom, or ritual to answer three economic questionsLittle room for innovationRevolves around a family unitFound in small, close knit communitiesIndividuals work to support the community not themselvesEx. Native Amazon tribes, African tribes, some 3rd world nations
6 Chapter 2.1 Questions What is an Economic System? What must happen for a nation’s standard of living to improve?Why would it be inefficient for a manufacturer to produce audio cassettes instead of CDs today?Which basic economic goals can be achieved easily in a traditional economy? Which cannot? Explain
7 Free Market SystemMarket – any arrangement that allows buyers and sellers to exchange thingsThese allow us to exchange things we have (money) for things we want (goods/services)Specialization – concentration of the productive efforts of individuals and businesses on a limited number of activitiesThis leads to the most efficient use of capital, land & laborSpecialization – every nation specializes, every state specializes (wyoming is an energy, tourism and agriculture state) every individual specializes. Mr. Haskins is Chemistry, I am business, Mr. Fulton is History and Government
8 Free Market SystemFree Market Economy – answers to the three economic questions are made by voluntary exchange in markets.Also known as Capitalist EconomyIndividuals and privately owned business own the factors of production, make what they want, and buy what they wantHousehold – a person or group of people living in a single residence. Own factors of production and also consume goods and servicesFirm – an organization that uses resources to produce a product or service, which it then sells. Firms transform factors of production into goods/services
10 Free Market SystemFactor Market – When firms purchase factors of production from householdsHiring workersRenting land or buildingsProduct Market – households buy the goods and services that firms produceHow does the marketplace function?Self Interest – buyers and sellers consider only their own personal gain. This motivates people to act.Incentives – hope of reward or fear of penalty that encourages a person to behave in a certain wayCompetition – the struggle among producers for the dollars of consumersSelf interest and competition work together to regulate the marketplaceHigh school incentivesAttendance policy – negative incentive/fearGrading scale – if you want a certain grade you will behave in a certain wayCode of Conduct policy – if you want to participate in activities you will follow/behave in a certain waySociety is based on incentivesWork – get paidSpeed – pay a traffic ticketBecause individuals look for incentives they are always looking for the best deals, ways to save money and find the lowest pricesSelf-interest spurs consumers to purchase certain goods and services and firms to produce them.. Competition causes firms to produce more and moderates their desire to raise prices. Thus, consumers get the products they want at prices that closely reflect the cost of producing them.Invisible Hand – self regulating mechanism of the marketplace
11 Free Market System Advantages of the Free Market: Economic Efficiency – market responds efficiently to rapidly changing conditionsEconomic Freedom – individuals work where they want, businesses produce what they want, households consume what they wantEconomic Growth – competition encourages innovation, thus free markets encourage growthAdditional GoalsConsumer Sovereignty – the power of consumers to decide what gets producedThere is no country in the world that has a truly “Free Market”Free Market – U.S., Hong Kong, Canada are some of the closest to operating a truly free economyU.S. government controls certain things like military, helping with the jobless, etc.
12 Chapter 2.2 Questions How does specialization make us more efficient? How do self-interest and competition affect the free market?Why do you think no country has a pure free market economy?
13 Centrally Planned Economies Centrally Planned Economy – the government, rather than individual producers and consumers, answer the key economic questionsGovernment owns the land and capitalGovernment decides where people work and what they are paidAlso known as a “Command Economy”Opposed to private property, free market pricing, competition and consumer choice
14 Centrally Planned Economies Two types of government associated with Command EconomiesSocialism – not a single economic system; rather, a range of economic and political systems based on a belief that wealth should be evenly distributed throughout societyCommunism – central government owns and controls all resources and means of production and makes all economic decisionsSoviet UnionChinaSocialist principles can co-exist with free-market principlesTax structure taxes the rich more and then some of that money is redistributed to poor through food stamps, unemployment benefits etc. U.S., SwedenSoviet Union decided to aim for national power and prestige. The gave the best land, labor, and capital to the armed forces and heavy industry. This resulted in shortages in some goods and farmers had to work in state-owned farmsChina started with full communist tendencies but by the late 1970’s started to give some freedom back to individuals. The government still owns a majority of major firms in the major industries and still controls many economic decisions but they aren’t 100% centrally planned
15 Centrally Planned Economies Disadvantages of Centrally Planned EconomiesEconomic Efficiency – since government owns everything and fixes wages, workers lack incentive to work faster or produce moreEconomic Freedom – individual freedoms sacrificed in order to pursue societal goalsEconomic Growth – innovation is not promoted and they do not encourage entrepreneurshipEconomic Equity – government officials are typically wealthy and workers are typically poor and suffer shortagesAdditional Goals – has provided secure jobs and income
16 Chapter 2.3 QuestionsWhat does a centrally planned economy oppose that a market economy encourages?Explain why each of the following goals is difficult to achieve in a centrally planned economy:Economic freedomEconomic growthWho benefits and who suffers most from a centrally planned economy? How?
17 Mixed Economies Most economies today are “mixed” Mixed Economy – a market-based economic system in which the government is involved to some extentthe degree to which the government is involved varies from nation to nationFree market cannot provide all services needed, thus Government steps in:DefenseHighway systemEducation SystemJustice systemLaws & regulations – fair marketplaceGovernment also protects individuals “Property Rights” – right to own a businessLaiezz Faire – The idea that the government lets the market be and does not intervene at all. Basis of free market policy
18 Mixed economies Government in the Factor Market Government pays employees, over 152 billion at the time of this book was publishedGovernment in the Product MarketGovernment purchases goods and services typically from private firmsTransferring MoneyGovernment collects taxes from both individuals and firmsThis money is transferred to other individuals or firms for a variety of reasonsAg subsidiesWelfareDisability
19 Mixed Economies A wide variety of Mixed Economies exist Economic Transition – a period of change in which a nation moves from one economic system to anotherPrivatization – the process of selling businesses or services operated by the government to individual investorsChina is currently selling state owned businesses to individuals and then letting them compete in the market placeNorth Korea – More Centrally PlannedChina – Transitioning, one of if not the most fast growing economy in the world. Lots of people are investing in China currently because of the growthU.S. – More Free-marketHong Kong – most free-market country in the world currently
20 Mixed Economies U.S. Economy Founded on Free-Market principles Free Enterprise System – an economic system characterized by private or corporate ownership of capital goodsGovernment intervention plays a key role in economyHowever, government allows marketplace to operate with minimal regulationU.S. enjoys a high level of economic freedomGovernment InvolvementSome argue the government should offer more services (be more socialized)Others argue the government is already to big and should offer fewer servicesNew Banking Regulation???New Health Care Reform in Spring 2010
21 Chapter 2.4 QuestionsWhy have some nations began an economic transition to a free enterprise system?How does laissez faire differ from a centrally planned government?How is China carrying out privatization?