Starter Define these terms in your own words: – Human capital – Investment – Capital investment – Capital goods – Consumer goods – Opportunity cost – Trade-off

7.06 Compare and contrast how different economic systems address key economic factors.

Market Economy An economy where producers are free to produce what they choose and consumers can consume what they choose Choices Market- organized exchange of goods or services Profit motive- producers will make what consumers want (consumers buy goods, producers make a profit) Consumer sovereignty- consumers control the market because of demand

How are Prices set in a Free Market? Adam Smith- wrote the book Wealth of Nations – Invisible hand 1.Producers will make what is most profitable 2.Consumers have incentive to buy goods at the lowest cost 3.These must be allowed to work itself out There is an invisible hand controlling things

Invisible Hand Theory Depends on: – Competition: buyers and sellers competing to make profit or buy things cheaply – Capitalism- personal ownership of businesses No government control of the 4 factors of production – Free enterprise- freedom to buy or sell anything Laissez-faire economics- “leave alone”

Communist Command Karl Marx- The Communist Manifesto – Socialism: government controls all capital – Communism: perfect world where everybody owns everything: socialism at its perfect stage – Cooperation: working together for a common goal – Command economies: prices and production are controlled by the government Most nations who have used this model have failed – The government gets power, and will not release it to the people

Mixed Economies Most are mixed (part free and part command)

Keynesian Theory Led to increased government involvement in market economies Calls for aggressive government fiscal policy Fiscal Policy- the government’s strategy for using spending and taxation to start the economy Deficit spending- spending money you do not have

Today’s Assignment 1.Compare and contrast Adam Smith and Karl Marx. 2.Would you rather live in a capitalistic or communist society? Explain your answer. 3. How is Keynesian theory like having a credit card? Explain. 4.What is the biggest difference between a market economy and a command economy?