Bell Ringer What do you know about the differences between capitalism and communism?

Objectives Identify the three key economic questions that all societies must answer. Analyze the societal values that determine how a country answers the three economic questions.

Introduction Each society is guided by its economic system, which affects the way in which it does business within the society itself and with other societies. A society’s values, such as freedom or tradition, guide the type of economic system that society will have.

Three Economic Questions As a result of scarce resources, societies must answer three key economic questions: What goods and services should be produced? How should these goods and services be produced? Who consumes these goods and services?

What goods and services should be produced? Question 1 What goods and services should be produced? Each society must decide what to produce in order to satisfy the needs and wants of its people. What can be produced is also limited by a society’s available resources.

How should goods and services be produced? Question 2 How should goods and services be produced? As a society decides how to produce its goods and services, it must consider how to efficiently use its land, labor, and capital.

Who consumes goods and services? Question 3 Who consumes goods and services? This question is largely determined by how societies distribute wealth/income. If not wealth, then another metric is used to determine who will get to consume the goods and services produced. Ex.- Government loyalty, family lineage, control of power, etc.

How does the United States answer the three key economic questions? Review/Summary How does the United States answer the three key economic questions? What? How? Who?

Economic Goals Assignment Jigsaw Get into a group of five people Read pg. 25-27 “Economic Goals” Assign one goal for each person to read, take notes on, and report back to rest of the group 2-3 bullet points per section Put into your notes

In your opinion, how does American society prioritize these goals? Review/Summary Societies value some economic goals over others, and often these goals are in conflict with one another. In your opinion, how does American society prioritize these goals? Rank the goals from most important to least important (Summary for today’s notes)

Bell Ringer The three key economic questions are ________? ________? and ________? What are the five economic goals? Which of the goals do you think is the most important for a society to achieve for its people? Why?

Introduction Economic system: the methods and philosophies that a society uses to produce and distribute goods/services Today, there are four basic types of economic systems: Traditional Free market Command/Planned Mixed

Free Market Economy What are the characteristics of a free market economy? A free market economy is characterized by: Households and firms Economic freedom Private ownership Self-interest & Competition

Self-Interest In The Wealth of Nations (1776), Adam Smith observed that in the countless transactions that occur in the market, the buyer and seller consider only their self-interest. Self-interest is the motivating force in the free market.

Competition Why is competition important to the free market? Self-interest and competition work together to regulate the marketplace. Smith called this self-regulating mechanism of the market “the invisible hand.” http://www.youtube.com/watch?v=ulyVXa-u4wE 15

Advantages of a Free Market Under ideal conditions, free market economies have the following economic advantages: They respond to rapidly changing conditions. They have a large degree of economic freedom. They encourage economic growth. They lend themselves to consumer sovereignty. Answer: Consumer sovereignty.

A not so “Free” Market Despite the advantages of a free market economy, no country today operates under a pure, unregulated free market.

Storyboard Create a storyboard of the concept of the “invisible hand.” The storyboard should include: Section title (“The Invisible Hand”) 3-5 sentence summary of concept* Visual/illustration that gives an example of the concept Create a test question *Page 33 in the textbook

Key Terms market: any arrangement that allows buyers and sellers to exchange things free market economy: an economic system in which decisions on the three key economic questions are based on the voluntary exchange in markets

Key Terms, cont. incentive: the hope of reward or fear of penalty that encourages a person to behave a certain way invisible hand: a term coined by Adam Smith to describe the self-regulating nature of the marketplace consumer sovereignty: the powers of consumers to decide what gets produced

Command Economy What are the characteristics of a command economy? A command (or planned) economy is characterized by: Government answers the three economic questions (What? How? Who?) Government ownership of land, labor, and capital Private property, free market pricing, competition, and consumer choice

Socialism The term socialism describes a range of economic and political systems based on the belief that wealth should be evenly distributed throughout society. The “Robin Hood Principle”

Communism Under communism, the central government owns and controls all resources and means of production. Communism derived from the writings of Karl Marx The inevitable cost of the free market, according to Marx, was the exploitation of workers and an unfair distribution of wealth. Checkpoint Answer: Marx believed that the price of capitalism was the exploitation of workers and an unfair distribution of wealth.

Key Terms command economy: an economic system in which the government makes all decisions on the three key economic questions socialism: a range of economic and political systems based on the belief that wealth should be distributed evenly throughout society

Market or Command Economy? Read the excerpts from The Wealth of Nations and The Communist Manifesto. Summarize each passage in your own words. Create two T-charts, each listing the costs and benefits of both free market and command economies. List at least five for each side. Imagine you are an economist helping with the creation of a new nation. Which economy should the nation adopt: a totally free market economy or a strict command economy? Why? Minimum five sentences. Refer to your cost-benefit analysis.

Why do you think this is? Bell Ringer # of countries with completely free market = 0 # of countries with total command economy = 1 Therefore, all (functioning) economies are a mixture of both… Why do you think this is? U.S.A. Lower taxes More entrepreneurs More $ incentives More freedom More growth Sweden Higher taxes More benefits/services “Free” college & health care More equality More security Same Business ownership Social services/welfare Resource efficiency

Introduction What are the characteristics of a mixed economy? A market-based economy with some government intervention Government helps societies meet needs that would be too difficult for them to meet under a totally free market economy… such as?? Government protects property rights and ensures fair exchanges in the marketplace

Mixed Economy Even free market thinkers like Adam Smith recognized the need for a limited degree of government involvement in the economic marketplace. In a mixed economy, the market is free but has a certain degree of government control.

Spectrum of Mixed Economies Almost all modern economies are mixed economies. 29

Privatization Many former communist countries have moved closer to a mixed economy through privatization. Privatization is the transfer of ownership from the government to private citizens.

China China is moving closer to the center of the economic continuum Over the past twenty years, China has gone through an economic transition through privatization of state-owned firms.

Privatization Privatization in the U.S. has had mixed results. Often, increased profits come with moral consequences: For-Profit Charter Schools Blackwater in Iraq “Kids for Cash”

Key Terms laissez faire: the doctrine that government generally should not intervene in the marketplace mixed economy: a market-based economic system in which the government is involved to some extent privatization: the process of selling businesses or services operated by the government to individual investors, and then allowing them to compete in the marketplace

Mixed Economy Flow Chart Working in a small group, create your own circular flow chart for a firm (company or service) of your choosing. Follow the circular flow model found on page 40 in the textbook, plugging in details for the firm that you chose. https://youtu.be/B43YEW2FvDs?t=5m37s 34