Is it more efficient to produce 8 million tons of watermelons and 14 million pairs of shoes or 21 million tons of watermelons and no shoes? Explain your answer.

Friday, September 8, 2017 Objective:  Students will be able to explain the benefits of the US Free Enterprise System and interpret the circular flow model of economic activity. Purpose: Knowing how our economic system operates will help each of you perform certain roles effectively and how they impact others.

Drawing Production Possibilities Curves You need to decide on the two goods that you want to compare. Production Possibilities Frontier: the line that goes from the vertical axis to the horizontal axis is called the This line shows the most efficient combinations of two goods that a country can produce at any one time. Law of Increasing Costs: as production shifts from making one good or service to another, more resources are needed to increase production of the second good or service

This photograph shows an area of farmland that was converted to housing. The opportunity cost of the housing is the crop that could have been grown on that farmland.

Drawing Production Possibilities Curves Can a country ever move beyond the current PPF curve?

Drawing Production Possibilities Curves YES they can BUT they have to do one of the following: Increase their Technology Add more Resources Once one of the above actions is done, the country can produce beyond the current PPF curve and move the curve outward

New technology, such as these robots, can increase the efficiency of a nation’s production and lead to economic growth.

Based on this curve, how would you describe a situation in which Capeland produces 10 million tons of watermelons and 10 million pairs of shoes?

By directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. . . . By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. After reading the quotation, how does society benefit from economic activity in which people seek their own advantage or benefit?

Economic Goals of a Society Efficiency: using resources in ways that maximize production Certainty/Predictability Growth Equity/Fairness

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

Capitalism Capitalism: an economic system in which decisions on the three key economic questions are based on voluntary exchange in markets Also called the free market or free enterprise system Individuals and privately owned businesses own the factors of production, make what they want, and buy what they want

Circular Flow Model Households: a person or group of people living in the same residence They provide land, labor, and capital to businesses/firms Firm: an organization that uses resources to produce a product which it then sells (also called a business) Factor Markets: markets in which the factors of production are bought and sold Product Markets: markets in which goods and services are bought and sold

Crash Course https://www.youtube.com/watch?v=B3u4EFTwprM

Warm Up How does the quest for profits motivate businesses to produce what consumers want? How does the quest for profits affect how businesses pay their employees? Are free markets operating in self-interest alone the only thing necessary to a successful, happy society? Explain your answer.

The circular flow model shows the interaction between households and firms in a free market. What is the primary item that changes hands in the monetary flow?

Characteristics of Free Enterprise Private Property Rights: the concept that people have the right and privilege of owning and controlling their possessions as they wish Incentive: an expectation that will encourage people to behave in a certain way (e.g., increase your productivity in hopes of increasing your wages) Profit: The possibility of making a profit motivates people to improve their economic well-being

In a free market, incentives of all sorts influence individuals to act in their own self-interest. Use one of the examples from this diagram to explain how the incentive given leads to the response indicated.

Characteristics of Economic Systems Economic Freedom: the right to make your own economic decisions Examples: choosing your own career, choosing what to purchase with your money Competition: the struggle among producers for consumers’ business competition gives us the best product at the lowest price

How Capitalism Works According to Adam Smith, participants in a free market consider their self-interest (an individual’s own personal gain) before acting Consumers, pursuing their self-interest, have the incentive to look for lower prices The firm has the incentive—from more potential sales and profits—to produce more products

How Capitalism Works “The Invisible Hand” Self-interest and competition tend to work together to keep the marketplace fair and its prices responsive Because of competition and consumer demand, businesses cannot afford to set their prices too high, or else they won’t make a profit

Benefits of the Free Enterprise System Individual Freedom to make economic decisions based on our self-interests Variety of Goods available to produce and purchase Efficient response to changing marketplace conditions Competition leads to innovation and growth

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? Explain your answer.

Role of the Government in Capitalism ensure that producers provide consumers with information that is honest and clear protect public health, safety, and well-being

The role of government in protecting consumers includes regulations directing car companies to provide detailed information about the vehicles they sell.

Summary Think back to Adam Smith’s idea that economic self-interest produces good results for society How does the quest for profits motivate businesses to produce what consumers want? How does the quest for profits affect how businesses pay their employees? Are free markets operating in self-interest alone the only thing necessary to a successful, happy society? Explain your answer.