Today’s Objectives

Introduce Chapter 3 – Markets

You will…Have a better understanding of PPF and

productivityStudy for your quiz next class (summative

grade)Understand the 3 types of markets and how

they operate within a society

ECONOMIC SYSTEMS

CHAPTER 3

5 Fundamental Questions of All Economic Systems

What goods and services will be produced?○ Limited by scarcity of resources

How will the goods and services be produced?○ Limited by the human capital and capital available

Who will get the goods and services?○ How do you decide who “deserves” it?

How will the system accommodate change? How will the system promote progress?

Scenario: What Would You Do? What goods and services will be produced?

○ Of the following, which will you produce for your people? Choose ONLY 4

Local Defense, Food, Healthcare, Clothing, Technology, Transportation, Public Schooling, National Defense

How will the goods and services be produced?○ Who will produce it? The People or the Government?

Who will get the goods and services?○ Prioritize the following groups and why they get it first.○ Rich, Middle Class, Poor, Adults, Children, Sick,

Healthy

Create your “Island” and explain how your society would work.

What are the goals of choosing an Economic System? 6 Major Goals to Achieve

○ Have to pick though, impossible to achieve all○ Can’t be equal and freedom – work against each

other

Econ. Freedom Econ. Efficiency Econ. Equality Econ. Growth Econ. Stability Econ. Security

What are the goals of choosing an Economic System? Economic Freedom – all people have full

freedom of what to make and buy or sell without government interferenceUsually a goal, but tough to achieve fullyPeople want protection from violators and

government expected to do this Economic Efficiency – economy strives

to not waste ANY of its resourcesIncludes all natural and human resourcesHas a goal of FULL EMPLOYMENT – no waste

What are the goals of choosing an Economic System? Economic Equity – strives to give all in

society an equal amountProblems arise with what is equal?

○ Does everyone get a little? ○ Do the rich or the poor receive more?

Economic Growth – strives to produce more and better goodsUsually a goal of all economic systems

What are the goals of choosing an Economic System? Economic Security – strives to support

those in society who cannot provide themselvesIncludes the too young or old, sick or dying, etc.

Economic Stability – strives to keep the economy stable and running wellKeeps things predictable; having goods, water,

electricity, jobs and prices relatively consistent

What is an Economic System? Economic System – how a country

decides to create, buy and sell products and resources

Three Major Economic SystemsTraditional/Subsistence – rare; usually found in

clan/nomad life ○ American Indian Tribes, African Tribes

Socialism and/or Communism - USSRFree Market or Capitalism – USA, Europehttp://www.youtube.com/watch?v=B3u4EFTwprM

Where are the people in each cartoon?

Who or what decides what consumers get in Cartoon A? Cartoon B?

 

What advantages and disadvantages do you see represented in Cartoon A? Cartoon B?

Which store would you prefer to shop in, and why?

Command Economy Socialism or Communism All Fundamental Questions

answered by a government bureaucracy.

○ Government commands what is created and how much

A central plan was created to determine the parameters of the economy.

○ Limits flexibility of products and creates shortages

Failure of the Command Economy Coordination of economy was a HUGE job

○ Must plan for EVERY product a nation needs

No accurate measurement of success○ No incentive to produce faster or better○ No chance to improve by showing your productivity

Mistakes were made Problems in supply of one product could

adversely affect other products (lack of substitutions)

The Market Economy Capitalism Private ownership of

resources Markets determine

economic activity (i.e. “supply and demand”)

Consumers themselves answer some of the fundamental questions

Government plays a role – regulation, encourage competition and fairness, but not direct role in setting prices.

NORTH KOREA

EXTREMELY RESTRICTED BY

THE GOVERNMENT

HONG KONG

EXTREMELY FREEFEW REGULATIONS

“The Invisible Hand” Idea created by Adam Smith in his book The

Wealth of Nations (1776) Adam Smith is the “father of Economics”

People’s self-interest actually benefits the social interest without the person knowing

○ An actual “invisible hand” running the economy○ Coordinates needs even if you’re being evil

Meaning selfishness still helps to run the economy

Competition results in maximization of profits at lowest possible cost to consumers

60 Second Lessons in Economics

Incentives in a Market Economy

Hard work, skill, innovation = more sales, more profit

○ Potential personal gain may result in better life

Assuming of risk is encouraged = desire for greater wealth

Freedom of choice – further own self-interest through choices made in the market.

Private Property – ideas and goods are yours; not owned by the government

Private Property

What is your definition of private property?

The right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital and other property

What are the advantages of an economic system which allows people to own property?

Encourage investment, innovation, exchange, maintenance of property, and economic growth.