© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS Slide 1 Understanding Economic Systems Objectives: By the end of class, students will be able to:  Describe four economic systems  Explain how demand and supply work  Identify the four factors of production  Describe how supply and demand function in various societies.  Identify three economic questions that every society must answer.  Distinguish between free enterprise and socialism.  Define the labor theory of value.

© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS The four factors of Production  Land  Labor  Capital  Management Slide 2

© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS Land  Land is the actual land that contains the other three factors of production.  For example, the land that our school is located on is one of the four factors of production Slide 3

© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS Labor  Labor is the human element that creates products or services.  For example, in our school, the teachers, secretarial staff, custodial staff, Teaching assistants and food service workers are all considered labor. Slide 4

© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS Capital  Capital is any improvement onto land.  For example, the capital in our school includes: the school building, parking lot, tennis courts, desks, and chairs among others. Slide 5

© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS Management  Management are the people who manage the other three factors of production when producing products or providing services.  In our school, Mike Sullivan and Chris Clouet are considered management Slide 6

© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS Slide 7 Economic Systems  Traditional economy  Command economy  Market economy  Mixed economy

© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS Traditional Economy  In a traditional economy, the ways to produce products are passed from one generation to the next. Slide 8

© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS Command Economy  In a command economy, the four factors of production are controlled by the government.  The government decides how to best allocate the four factors of production.  The government determines all prices, styles, colors, and quantity of products produced.  Individuals have no say within a command economy.  North Korea and Cuba are tow countries that utilize command economies Slide 9

© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS Market Economy  In a market economy, the people rather than the government control the four factors of production.  The purpose of most businesses under a market economy is to make a profit.  Profit is the difference between price and cost Slide 10

© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS Mixed Economy  A mixed economy combines various aspects of market and command economies.  The U.S. economy utilizes a mixed economic system.  For example, libraries, Post offices and other government buildings are controlled by the government while still allowing for private ownership in other industries such as resaurants and clothing stores. Slide 11

© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS Slide 12 Chapter 1 Supply and Demand  Supply is the quantity of a product that producers are willing and able to make available for sale at various prices over a given time period.  Demand is the quantity of a good or service that consumers are willing and able to buy at various prices during a given time period.  Equilibrium price is the price for a product at which the quantity supplied exactly equals the quantity demanded of that product

© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS Slide 13 Chapter 1 Demand Curve Quantity y Price Demand curve x

© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS Slide 14 Supply Curve Quantity y Price Supply curve x

© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS Slide 15 Equilibrium Price 100 Quantity y $1 Price Demand curve Supply curve x

© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS Slide 16 Surplus Graph Quantity y $1 Price Demand curve Supply curve $2 surplus x

© Thomson/South-Western ECONOMIC EDUCATION FOR CONSUMERS Slide 17 Shortage Graph Quantity y $1 Price Demand curve Supply curve $.50 shortage x