23 Basic Questions What goods and services should be produced? How should these goods and services be produced?Who consumes these goods and services?
3What to Value?Economic System – method used by a society to produce and distribute goods and servicesEasiest way to distinguish an economy is by who answers the basic questions OR owns and controls the factors of productionDependent upon that society’s goals and values.What should a society value?What do you value?Do different societies have different values?
4Goals & ValuesEconomic Efficiency – maximize what you can get with what you have to work with.Economic Freedom – be able to make your own decision from a variety of choices.Economic Security – knowing you can find the goods/services that you need.safety net – set of government programs that protect people experiencing unfavorable economic conditionsEconomic Equity – does everyone get the same?Economic StabilityEconomic Growth – the economy must grow for a nation to improve.standard of living – level of economic prosperity
5Traditional Economies Relies on habit, custom,or tradition to answerthe 3 basic questions.OR the village controls the factors of production--resources are sharedEverything revolves aroundfamilyYour occupation would be what your ancestors have always doneSmall and close communities that engage in subsistence agriculture
6Traditional Society ADVANTAGES Simple, natural, caring DISADVANTAGES Struggle to cope with large disastersSlow to adapt to changeLack modern conveniencesNo social mobility
7Market EconomiesIndividuals answer the basic questions based on exchange or trade.Factors of production are privately ownedChoices determine what is produced and who gets it.Also referred to as theFree Market or Capitalism.
8Why Engage in Exchange?Self-interest motivates people to exchange and tradeBy looking out for their own utility (getting what they want) society becomes better offProducers seek greater profit, workers higher wages, consumers the best dealCompetition regulates the market and keeps it reasonably fairProducers seek profit and low costsConsumers seek the best deals to satisfy their wants and needs
9Incentive – ways of altering behavior (taxes, punishment, candy) Economists believe few problems cannot be solved by the right incentivesInvisible Hand – phenomenon by which a market operates fairly without planningConsumers get what they want, as do producers
10Free MarketMarket – arrangement of buyers and sellers to exchange things.Flea market, ebaySpecialization – makes businesses and the economy more productive and efficientHouseholds / individuals own the factors of productionMarkets organize trade and exchange in a non-fraudulent wayAllows all parties to benefit“The meaning of economic freedom is this: that the individual is in a position to choose the way in which he wants to integrate himself into the totality of society.” ~Ludwig von Mises
11Factor & Product Markets All economic transactions take place on one of two marketsFactor market – resources are bought and sold (raw)Rent, land, laborProduct market – where goods/services are purchased by households (cooked)
15Free Market Advantages Efficiency – highly productive and responds rapidly to changeFreedom – work, produce, consume how/want you wantPotential for Growth – creative destruction, innovationConsumer Sovereignty – “customer is king”If anyone rules the free market, it is the consumerIf you don’t like it—don’t buy it!
16Free Market Disadvantages Vast amounts of inequality and insecurityGreater chance of failureOR wealth is spread unevenlyNot only is a large percentage of the population in poverty, but a disproportionate amount of the population holds the majority of the wealth
17Command Economies Central government answers basic economic questions. Government controls the resourcesDistribution based on equityNo choices given topeople.Elite inner circle of planners decide what & how much gets made along with how much to charge for itThus the name “Central Planning”Stalin at the Helm
18Centrally Planned Economies Government controls factors of production and wages, sets prices and output goalsCommunism - (authoritarian) complete governmental controlSocialism – blend of centrally planned and free market systemsincludes high degrees of regulation, high taxation, large safety nets and some economic planning
19Disadvantages: Central Planning No efficiencyPoor quality, shortagesPerformance never meets idealsLack of incentivesNo innovation or profit, no private property, price controlsSacrifice of individual freedomsGov’t decides what industries are essential
20Advantages: Central Planning No competitionFew business failures and few mega-rich citizensBasic securityEssential amounts of most necessities are availableEx: healthcare, cooking oil, bread…General equalityMajority of population experiences a similar lifeNo class divisions, jobs for mostWealth theoretically spread more evenly
21Mixed Economies Market-based economy with government making some decisionsGood deal of control and regulationMost modern economies are mixed.China, India, the US
22Modern EconomiesTransition – economies typically moving from centrally planned to free-market are characterized by a few observations:Privitization – businesses are transferred from state (gov’t) control to individuals, allows for competitionLess nationalization—fewer state-run firmsRespect for rule of law and private propertyEncourages outside investment
23Bovine EconomicsCOMMUNISM: You have two cows. The government takes both and gives you some of the milk.SOCIALISM: You have two cows The government takes one cow and gives it to your less fortunate neighbor.TRADITIONAL: You have two cows; you want chickens; you set out to find another farmer who will trade eggs for milk.CAPITALISM: You have two cows. You sell one and buy a bull.