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Chapter 2 – Economic Systems

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1 Chapter 2 – Economic Systems
Resources are scarce everywhere, thus: Every country must answer three economic questions What goods and services should be produced? How should these goods and services be produced? Who consumes these goods and services? Economic System – the structure of methods and principles a society uses to produce and distribute goods and services.

2 Economic Systems EX: Florida Oranges Alaskan crab & oil Siberia oil
Columbian coffee Iraq oil

3 Economic goals and societal values
Every society pursue each goal to some degree: Economic Efficiency – maximize what can be produced can’t be efficient unless you can provide the right goods to the right people at the right time Economic Freedom – the opportunity for individuals to make their own choices Economic Security – people want to know that goods/services are available when needed and that they will get paid on time Safety net – governments programs like workman’s compensation, unemployment compensation, social security disability payments Economic efficiency ex. – if people want laptop computers but a company keeps building desktops, is that an efficient use of capacity??? Must know what needs and wants of a society are. Economic freedom – the ability to choose what to buy from whom, what to make and how. Not all countries have this. Americans value this highly. Economic Security -

4 Economic goals and societal values
Economic Equity – deciding who gets how much payment. Each society is different. Economic Growth – economy should grow with rising population and for individuals to have wage growth Standard of Living – level of economic prosperity Innovation – process of bringing new methods, products, or ideas into use Instrumental in economic growth i.e. industrial revolution, computer technology, etc. Goals in Conflict – some goals undermine others i.e. safety nets can slow economic growth because they are expensive

5 Types of Economies Traditional Economy
Oldest and simplest economic system Relies on habit, custom, or ritual to answer three economic questions Little room for innovation Revolves around a family unit Found in small, close knit communities Individuals work to support the community not themselves Ex. Native Amazon tribes, African tribes, some 3rd world nations

6 Chapter 2.1 Questions What is an Economic System?
What must happen for a nation’s standard of living to improve? Why would it be inefficient for a manufacturer to produce audio cassettes instead of CDs today? Which basic economic goals can be achieved easily in a traditional economy? Which cannot? Explain

7 Free Market System Market – any arrangement that allows buyers and sellers to exchange things These allow us to exchange things we have (money) for things we want (goods/services) Specialization – concentration of the productive efforts of individuals and businesses on a limited number of activities This leads to the most efficient use of capital, land & labor Specialization – every nation specializes, every state specializes (wyoming is an energy, tourism and agriculture state) every individual specializes. Mr. Haskins is Chemistry, I am business, Mr. Fulton is History and Government

8 Free Market System Free Market Economy – answers to the three economic questions are made by voluntary exchange in markets. Also known as Capitalist Economy Individuals and privately owned business own the factors of production, make what they want, and buy what they want Household – a person or group of people living in a single residence. Own factors of production and also consume goods and services Firm – an organization that uses resources to produce a product or service, which it then sells. Firms transform factors of production into goods/services


10 Free Market System Factor Market – When firms purchase factors of production from households Hiring workers Renting land or buildings Product Market – households buy the goods and services that firms produce How does the marketplace function? Self Interest – buyers and sellers consider only their own personal gain. This motivates people to act. Incentives – hope of reward or fear of penalty that encourages a person to behave in a certain way Competition – the struggle among producers for the dollars of consumers Self interest and competition work together to regulate the marketplace High school incentives Attendance policy – negative incentive/fear Grading scale – if you want a certain grade you will behave in a certain way Code of Conduct policy – if you want to participate in activities you will follow/behave in a certain way Society is based on incentives Work – get paid Speed – pay a traffic ticket Because individuals look for incentives they are always looking for the best deals, ways to save money and find the lowest prices Self-interest spurs consumers to purchase certain goods and services and firms to produce them.. Competition causes firms to produce more and moderates their desire to raise prices. Thus, consumers get the products they want at prices that closely reflect the cost of producing them. Invisible Hand – self regulating mechanism of the marketplace

11 Free Market System Advantages of the Free Market:
Economic Efficiency – market responds efficiently to rapidly changing conditions Economic Freedom – individuals work where they want, businesses produce what they want, households consume what they want Economic Growth – competition encourages innovation, thus free markets encourage growth Additional Goals Consumer Sovereignty – the power of consumers to decide what gets produced There is no country in the world that has a truly “Free Market” Free Market – U.S., Hong Kong, Canada are some of the closest to operating a truly free economy U.S. government controls certain things like military, helping with the jobless, etc.

12 Chapter 2.2 Questions How does specialization make us more efficient?
How do self-interest and competition affect the free market? Why do you think no country has a pure free market economy?

13 Centrally Planned Economies
Centrally Planned Economy – the government, rather than individual producers and consumers, answer the key economic questions Government owns the land and capital Government decides where people work and what they are paid Also known as a “Command Economy” Opposed to private property, free market pricing, competition and consumer choice

14 Centrally Planned Economies
Two types of government associated with Command Economies Socialism – not a single economic system; rather, a range of economic and political systems based on a belief that wealth should be evenly distributed throughout society Communism – central government owns and controls all resources and means of production and makes all economic decisions Soviet Union China Socialist principles can co-exist with free-market principles Tax structure taxes the rich more and then some of that money is redistributed to poor through food stamps, unemployment benefits etc. U.S., Sweden Soviet Union decided to aim for national power and prestige. The gave the best land, labor, and capital to the armed forces and heavy industry. This resulted in shortages in some goods and farmers had to work in state-owned farms China started with full communist tendencies but by the late 1970’s started to give some freedom back to individuals. The government still owns a majority of major firms in the major industries and still controls many economic decisions but they aren’t 100% centrally planned

15 Centrally Planned Economies
Disadvantages of Centrally Planned Economies Economic Efficiency – since government owns everything and fixes wages, workers lack incentive to work faster or produce more Economic Freedom – individual freedoms sacrificed in order to pursue societal goals Economic Growth – innovation is not promoted and they do not encourage entrepreneurship Economic Equity – government officials are typically wealthy and workers are typically poor and suffer shortages Additional Goals – has provided secure jobs and income

16 Chapter 2.3 Questions What does a centrally planned economy oppose that a market economy encourages? Explain why each of the following goals is difficult to achieve in a centrally planned economy: Economic freedom Economic growth Who benefits and who suffers most from a centrally planned economy? How?

17 Mixed Economies Most economies today are “mixed”
Mixed Economy – a market-based economic system in which the government is involved to some extent the degree to which the government is involved varies from nation to nation Free market cannot provide all services needed, thus Government steps in: Defense Highway system Education System Justice system Laws & regulations – fair marketplace Government also protects individuals “Property Rights” – right to own a business Laiezz Faire – The idea that the government lets the market be and does not intervene at all. Basis of free market policy

18 Mixed economies Government in the Factor Market
Government pays employees, over 152 billion at the time of this book was published Government in the Product Market Government purchases goods and services typically from private firms Transferring Money Government collects taxes from both individuals and firms This money is transferred to other individuals or firms for a variety of reasons Ag subsidies Welfare Disability

19 Mixed Economies A wide variety of Mixed Economies exist
Economic Transition – a period of change in which a nation moves from one economic system to another Privatization – the process of selling businesses or services operated by the government to individual investors China is currently selling state owned businesses to individuals and then letting them compete in the market place North Korea – More Centrally Planned China – Transitioning, one of if not the most fast growing economy in the world. Lots of people are investing in China currently because of the growth U.S. – More Free-market Hong Kong – most free-market country in the world currently

20 Mixed Economies U.S. Economy Founded on Free-Market principles
Free Enterprise System – an economic system characterized by private or corporate ownership of capital goods Government intervention plays a key role in economy However, government allows marketplace to operate with minimal regulation U.S. enjoys a high level of economic freedom Government Involvement Some argue the government should offer more services (be more socialized) Others argue the government is already to big and should offer fewer services New Banking Regulation??? New Health Care Reform in Spring 2010

21 Chapter 2.4 Questions Why have some nations began an economic transition to a free enterprise system? How does laissez faire differ from a centrally planned government? How is China carrying out privatization?

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