Basic Economic Unit Part II Types of Economies Basic Economic Unit Part II

Types of Economic Systems

Traditional Little Change Based on Custom How they always have been answered

Command

Socialism Socialism: Government controls major industries and distributes many needs and wants

Communism Socialism with a dictatorship. Government controls everything

How do command economies answer the basic economic questions? The Government does

Market

Characteristics Private Individuals control factors of production Individual freedom to make choices

Basic Economic Questions Interaction between producers and consumers

All economies are actually mixed All economies are actually mixed. What determines whether an economy is considered market or command depends on the level of Government involvement.

Centrally Planned vs. Free Market North Korea, United States, Cuba, Germany, China More Gov. Less Gov.

Socialist or Market? “Proposed increase in minimum wage” “Oil prices soar because of Middle East unrest” “Stock prices plummet due to concerns over European markets” “FDA recalls Butterball Turkeys Over Salmonella concerns” “Recent freeze could lead to increase in cost of strawberries”

Market The exchange of goods and services between buyers and sellers

What does the Circular Flow Model illustrate?

Factor Market Where productive resources are bought and sold

Product Market Market where goods and services (finished products) are offered for sale

What happens when less is exchanged in the circular flow? The economy shrinks

What happens when more is exchanged? Economy grows

What can we use to measure the size of the economy? GDP The Dollar value of all FINAL goods and services produced in a nation in a year.

What is productivity? The amount of output that can be produced by a set amount of resources in a given period of time

Increasing Productivity Specialization = when people, businesses or countries focus on what they do best Division of Labor = breaking down of a job into small parts performed by different workers Investing in Human Capital = spending to improve worker skills

Specialization and Trade Fish Pineapple Jake 20 30 George 15 50

What do these practices create between individuals, communities and nations? Economic Interdependence dependence between people for goods and services

Characteristics of Capitalism Free Enterprise – Competition with little government interference Freedom of Choice – individuals can choose what work to do and what to buy (creates Consumer Sovereignty in the market)

Private Property – right to own and use our property how we choose within certain legal limits. Provides incentives to take care of and invest. Profit Incentive – (Self-Interest) the driving force of capitalism, the ability to accumulate wealth Competition – (the regulator) the struggle between buyers and sellers to get the best products at the best prices

Origins and Characteristics of Economic Theory Adam Smith

What was the Wealth of Nations? Smith’s book that explained the principles of Capitalism

What did Smith mean by Laissez-faire economics? “To let alone” Government’s only economic role is to ensure competition

The Invisible Hand Belief that individuals left on their own would work for own self-interest Would be guided by “invisible hand” to use resources efficiently (Government needs to do little)

Invisible Hand Self-Interest + Competition = Higher Quality + Lower Prices Most Efficient Use of Resources

Karl Marx Father of Communism

Das Kapital Exploitation of the working class

Failure of Capitalism The ‘haves’ and the ‘have nots’

Capitalists (Owners of the means of production) Class Conflict Capitalists (Owners of the means of production) And Workers

Capitalism’s Fall

Fault of Communism

John Maynard Keynes Established a new role of government in a Capitalist economy.

Way out of Depression Government to start spending

Franklin D. Roosevelt Public Works Program