1. 3 Questions & Economic Systems
AP Microeconomics

2. Need for Economic Systems
Scarcity necessitates choices, how society organizes itself to address this problem is known as its economic system.
Every economic system must make these choices or answer these questions:
– What to produce?
– How to produce?
– For whom to produce?
most controversial
and the one question that you will now confront . . .

3. Who Gets the Candy Bar?
Let’s brainstorm ideas on how to determine who will get the candy bar…

4. Economic Growth Increased production of goods and services over time
Measured by changes in the level of real Gross Domestic Product
Standard of living: health, literacy, life expectancy, etc.

5. Sustainability
Everything that we need for our survival and well-being depends, either directly or indirectly, on our natural environment

6. Economic Equity Some measure of fairness
Overall distribution of income
Equal opportunity or equality of outcomes

7. Economic Freedom
Freedom of consumers to decide how to spend or save incomes
Freedom for workers to change jobs or join unions
Freedom for people to establish new businesses or close old ones

8. Economic Stability/Security
Stable prices (avoid inflation or deflation) and full employment (using all of an economy’s scarce resources, particularly labor)
safety net: social security, welfare

9. Economic Efficiency Minimize waste
Produce the goods and services people want most
Economize resources in production of goods and services so real costs of production are as low as possible

10. What’s Your Priority? Category Class Total Freedom Growth Stability
Equity
Efficiency
Sustainability

11. So, Who Gets the Candy Bar?
Allocation Mechanisms
Lottery
First come
Market/Price
Command/Planner
Force
Share
Need

12. Three Fundamental Resource Allocation Methods → Economic Systems
Traditional
Market
Planning

13. Traditional Economies

14. Economic System:
Rules about how resources are allocated in a particular country or group of people.
Market Economy:
An economy that relies on a system of interdependent market prices to allocate goods, services, and productive resources and to coordinate the diverse plans of consumers and producers, all of them pursuing their own self-interest.
Command Economy:
An economy in which most economic issues of production and distribution are resolved through central planning and control.

15. The Market Economy Voluntary exchange between buyers & sellers
The Three Questions Answered:
Buyers determine the WHAT?
Sellers determine the HOW?
Income depends on production the For WHOM?
Prices are the signals or communication tool

16. Characteristics of a Market Economy
Private property
Freedom of enterprise and choice
Motive of self-interest
Competition
System of markets and prices
Limited government
Rule of law
Private property: factors of production owned by private individuals and private institutions rather than the government
Freedom of enterprise and choice: entrepreneurs are free to obtain and organize resources to produce and sell goods and services. Consumers are free to purchase goods and services to best satisfy their wants. Workers are free to pursue any job for which they are qualified.
Motive of self-interest: entrepreneurs seek profits, consumers seek satisfaction from their use of goods and services, workers seek the highest wages possible.
Competition: sellers compete on the basis of price, service and product quality.
System of markets and prices: markets bring buyers and sellers together and interact with one another with the buyer wanting to get the item at the lowest price and the sellers wanting to sell at the highest price.
Limited government: competitive markets promote the efficient use of resources. Government does not allocate resources, goods or services.
Rule of law: laws exist, are written down, are fair, are followed by EVERYBODY

17. The Centrally-Planned (Command) Economy
Economic decisions made by Government
The Three Questions Answered:
Central Planners decide the WHAT?
Central Planners decide the HOW?
Central Planners decide for WHOM?
Prices are set by planners

18. Characteristics of a Command Economy
Turkmenistan
Public ownership
Centralized decision making
Economic planning
Allocation by command
Cuba
North Korea
Iran
Libya
Burma
Community property: community ownership of factors of production, not private.
Planned economic activity: production is planned by a central planning unit and resources are assigned as needed.
Burma, Cuba, Iran, North Korea, Turkmenistan, Belarus.

20. Entrepreneurship in the US Economy Student Readings p. 20

22. In Reality all Economic Systems are a MIX or Mixed Model System
…but are based on either a Command basis or Market basis
Early
1980s
Hong Kong
N. Korea
Poland
France
Cuba
China
USA UK
Centrally
Planned
Free
Market
Early
2000s UK
Cuba
China
USA
Poland
France
N. Korea
Hong Kong

23. Command, Free, or Mixed Market?
Minimum wage laws are created.
The economic planning function is centralized.
The government sets quotas for production.
Consumers buy goods, and producers raise prices in response to greater demand.

24. Command, Free, or Mixed Market?
New suppliers in India sell products in the United States at a fraction of the price of American producers.
Workers have a lifetime job.
Prices are determined by a third party agency.
Self interest is the driving force.

25. How do Market/Command systems prioritize the goals?
Category
Market system
Command system
Freedom
Growth
Stability
Equity
Efficiency
Sustainability