3 Basic Economic Questions Who decides… What to produce? How to produce it? Who gets it?

Economic Goals of Society Efficiency Freedom Security Equity Growth

goods & services should be produced? What goods & services should be produced? “What to produce?” is an allocation question. All economic systems must determine how to allocate productive resources in the form of land (natural resources/raw materials), labor (work for which we earn pay) and capital (human - education & job training) (physical – buildings, equipment & tools).

should goods & services be produced? How should goods & services be produced? “How to produce?” is an efficiency question. All economic systems must determine how goods and services will be produced. Economic Systems answer ‘HOW’ in different ways.

Three Basic Economic Questions: HOW

In recent years, many retailers have turned to the Internet to sell their goods and services. How might the use of the Internet help achieve the economic goal of efficiency?

consumes the goods & services produced in society? Who consumes the goods & services produced in society? “For whom?” is a public choice question. All economic systems must determine which goods and services will be available for public use and which for private use.

Household income rose between 1976 and 2011 at all five income levels—but not at equal rates. Which income group (who) saw the greatest change?

Quiz: Three Basic Economic Questions How is a society’s economic system defined? A. by how it answers the three basic economic questions B. by the decisions it makes about who consumes goods and services C. by the resources it uses to produce goods and services D. by the trade-offs it accepts in order to produce goods and services

Quiz: Economic Goals of Society Which economic goal reflects the desire of individuals to make their own choices about owning property or becoming entrepreneurs? A. efficiency B. freedom C. security D. equity

Economic Systems

Traditional Economies “Tradition”= most important Economic activity based on how things have always been done. Habit and custom dictate economy Hunter/gatherer societies Individual decisions based on tradition, not what they would personally like to do.

Traditional Economies Disadvantages Advantages Clear roles Little uncertainty Low Risk What, How, and For whom to produce already decided Stable, predictable lives New ideas discouraged Strict roles No creativity, opportunity, or independence Stagnant Low Living standard

Market Economy Why Do Markets Exist? Today, markets can exist online, where buyers and sellers meet to exchange goods and services. How can a market exist in a place where people do not physically meet?

Market Economy People in firms act in their own best interests when making economic decisions Adam Smith “A Wealth of Nations” People’s decisions act as “votes” on various products and businesses “Market”= place where people gather to buy, sell and trade goods

Elements of a Free Market Economy Individuals and businesses make their own decisions about what to buy or sell. Market economies are also called capitalist economies because the capital that entrepreneurs invest in businesses is a vital part of the system.

Market Sectors Business Firms Public Sector Consumer Households

Product Market Where finished goods and services are supplied and demanded (bought and sold). Final goods or services are offered for purchase by consumers, businesses, and the public sector. Does not include trading in raw or other intermediate materials.

Resource/Factor Market Where factors of production (LLCE) are supplied and demanded (bought and sold). Business purchase resources to produce goods and services. 

Financial Market People trade financial securities, commodities, and items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds Commodities include precious metals or agricultural products.

Economic Flows Money Flows Real Flows Payments for goods and services (expenditures) Payments for factors of production (income) Goods and services Factors of Production

Resource/Factor Market Business Firms Resource/Factor Market Product Market Consumer Households Government

How Markets Self-Regulate Self-Interest- operate for personal gain Incentives and Competition- reward The Invisible Hand- Adam Smith Prices are responsive to collective market forces rather than the choices of individual producers

Incentives of all sorts influence individuals to act in their own self-interest.

Market Economy Advantages Disadvantages Adjusts to change over time High degree of individual freedom Encourages independence and creativity Little to no government influence Rewards only to “productive” individuals Economic conditions can be uncertain and unstable Not as many free and public services Possibility of market failure

The free market system offers many benefits to producers and consumers The free market system offers many benefits to producers and consumers. Which of the advantages of the free market do you think is most important to producers?

Quiz: Why Do Markets Exist? A. to allow people to earn money B. to concentrate the productive efforts of individuals C. to allow people to exchange goods and services D. to increase profits for business owners

Quiz: Elements of a Free Market Economy According to the circular flow model of a market economy, firms buy factors of production from households, then A. use these factors to produce goods and services. B. sell factors of production to households. C. sell free markets to households. D. use these factors to eliminate competition.

Quiz: How Markets Self-Regulate What role does competition among producers play in a free market? A. It allows firms to produce what consumers want while increasing prices. B. It causes firms to produce what consumers want while moderating prices. C. It encourages firms to produce goods consumers would never demand on their own. D. It forces consumers to pay high prices for what they want.

Quiz: Advantages of a Free Market Why does a free market economy result in the availability of a wide variety of goods and services? A. because consumers have incentives to meet producers’ desires B. because markets reward producers who can produce a large variety of products C. because producers have incentives to meet consumers’ desires for variety D. because the government tells producers what to make

Centrally Planned Economies

Command Economies Central authority makes most decisions Government- main economic influence Normal people are “commanded” about how the economy will be run

Socialism and communism share key similarities but also have key differences. Why do you think communism typically requires an authoritarian government while socialism does not?

Command Economy Disadvantages Advantages Doesn’t always meet wants/needs of consumers No incentive to work Little flexibility on day to day basis New ideas discouraged Easily change Little uncertainty Basic education, health, and public services at no cost

The Features of Central Planning Customers at a Cuban bakery receive their daily ration of bread allowed by the Cuban government. In this situation, who is deciding how much bread is produced by this bakery?

Quiz: The Features of Central Planning Who makes most basic decisions in a centrally planned economy? A. investors B. consumers C. government D. market forces

Quiz: Disadvantages of Central Planning What is one reason centrally planned economies tend not to be efficient? A. Workers lack the incentive to work harder. B. Decision-makers do not have enough power. C. Decision making is too decentralized to be effective. D. Factories produce too many types of goods.

Mixed Economies

Reasons for Mixed Economies Why Government Gets Involved in the Economy: Ensure fairness among the markets Advertisements Intellectual property and patents Treatment of workers Treatment of the environment Balancing Government Involvement and Economic Freedom: What rights are you willing to give up?

This circular flow shows how governments interact with households and businesses in a mixed economy. How does government affect the monetary flow in a mixed economy?

Government transfers some of the money it collects to people and businesses. Which part of the circular flow model of a mixed economy does this table represent?

Mixed Economies Today While almost all countries have mixed economic systems, some lean farther toward planned economies and others lean more toward free markets. How would you describe the location of the United States on this continuum?

The Economy of the United States While the American economy is a mixed system, the foundation of the United States economy is the free market. The United States free enterprise system is characterized by individual or corporate ownership of capital goods. Investments in firms are made in a free market by private decision.

The Economy of the United States In 2012, New York mayor Michael Bloomberg sought to ban large-sized soft drinks based on health concerns. The plan drew protests. How might such a ban restrict freedom?

Even in our free market, government places a number of restrictions on consumers. What is the purpose of government in each of these examples?

Quiz: The Reasons for Mixed Economies Governments have often become involved in market-based economies in order to A. preserve the traditional economy. B. address various limits of the free market system. C. reduce disruptive innovation. D. address shortcomings of central planning.

Quiz: Circular Flow Model of a Mixed Economy Police protection and national defense are examples of what government role in the circular flow model? A. producing goods and services from factors purchased in the factor market B. making purchases of land, labor, and capital in the product market C. contributing to the monetary flow between households and firms in the factor market D. hindering the physical flow of factors between households and firms in the product market

Quiz: Mixed Economies Today China’s economy is considered more mixed than North Korea’s because China A. recently took control of Hong Kong. B. has freer markets. C. has traditionally relied on central planning. D. was the first to adopt communism.

Quiz: The Economy of the United States What is an argument that some analysts use to criticize government regulation? A. It endangers safety. B. It promotes competition. C. It results in inefficiency. D. It provides for security.