Free Markets, Centrally Planned Economies, & Mixed Economies Ch. 2 Sect 2, 3 & 4; You Can't Always Get What You Want Back in the USSR

The Free Market Market: an arrangement that allows buyers and sellers to exchange things. Markets exist because of Specialization – Specialization: concentrating on a limited number of activities. – THINK…do you want me to DJ your next party??? Or PaulyD to teach you economics??? (definitely NOT Snooki.)

The Free Market Free Market Economy: a Market with voluntary exchanges A true “Free Market” has ZERO outside influence The market works because of self-interest and competition.

Centrally Planned Economies a.k.a. Command Economies CPE’s are the opposite of a Free Market In a CPE’s the government plans EVERYTHING. CPE’s oppose 1.private property, 2.free market pricing, 3.competition and consumer choice

Centrally Planned Economies Think about what goes into making a product in America. For example: what does it take to make a cotton shirt and get it to the consumer? How does it work in How does it work in a Centrally a Centrally Planned Economy? Planned Economy?

Communism vs. Socialism Communism: CPE with ALL economic and political power resting in the government – Always Authoritarian Socialism: a economic system that uses Democratic means to evenly distribute wealth throughout a society

What does this mean? Socialism: You have two cows. You give one to your neighbor. Socialism Communism: You have two cows. You give them to the Government, and the Government then gives you some milk. CommunismGovernment Capitalism (Free Market): You have two cows. You sell one and buy a bull. Capitalism Naziism: You have two cows. The Government shoots you and takes the cows. Naziism

The U.S.S.R. in One Slide Tzar Nicholas II murdered and Russian Monarchy falls (1917) Eventually Vladimir Lenin leads Bolsheviks and gains power. They change names to communist. Russia becomes a CPE. (1920’s) Best goods and services go to armed forces, space program and making farms and factories Committees determine the distribution of 24 million different goods and services Lack of incentive means production and quality slowly falls until U.S.S.R. is economically hurting. Eventually U.S.S.R. cannot continue competing and falls apart (1991)

Mixed Economies In truth there are no true free market economies or centrally planned economies. Most economies are a mix of the two.

What Do You Like on a Sundae? You and your partner discuss it. What toppings do you like on an ice cream sundae? – Plain Vanilla? – Or absolutely everything (and I mean everything)?

When discussing economies, most countries are somewhere in between the two. When a country is not completely a command economy and not completely a market economy, but somewhere in between, it is called a Mixed Economy. Were you somewhere between plain and everything? READ then WRITE!

“Pure” Command Economies If government controlled everything in the economy, then having a diversity of products would be very difficult. With no private businesses, there would be no competition, and products would never improve. The government could make the economy exploit the poor and benefit the rich.

Problems with Centrally Planned Economies Lack of incentives and competition mean focus goes to quantity and not quality. Also there is no reason for innovation.

“Pure” Free Market Economies If an economy was pure market, people could sell anything, even things that could hurt others. Businesses could make things cost as much as they wanted. In order to make products cheaper, they could skimp on safety and benefits for workers.

Problems with Free Markets In a true free market, some things will not get built, other things will get abused and nothing will be free. Examples: parks, schools, armed forces

Most Countries Lie Somewhere in Between *However, they may be closer to one side than the other.

monetary flow physical flow monetary flow physical flow Circular Flow Diagram of a Market Economy Households Firms Product market Factor market Households pay firms for goods and services. Firms supply households with goods and services. Households supply firms with land, labor, and capital. Firms pay households for land, labor, and capital. The Free Market Economy In a free market economy, households and business firms use markets to exchange money and products. Households own the factors of production and consume goods and services. P 30 in text

Market Structures p.170 Perfect Competition Monopolistic Competition OligopolyMonopoly # of Firms Many A FEW dominate ONE Variety of Goods NoneSome None Control over Prices NoneLittleSomeComplete Barriers to entry NoneLowHighComplete ExamplesWheat, Shares of Stock Jeans, booksCars, Movie studio Public Water YOUR Example

Circular Flow in a Mixed Economy Page 42 The government now sits in the middle of the circle. It has expenditures to businesses and individuals It takes taxes out of the monetary flow of both businesses and individuals But it also makes purchases from both as well.

Comparing Mixed Economies Just because they are mixed doesn’t mean they are evenly mixed. Some economies are closer to Free Market Economies, some are closer to Centrally Planned Economies.

Mixed Economies that are more like Centrally Planned Economies Examples of Mixed Economies in which the government dominates are North Korea and Cuba. In North Korea it is illegal to import goods; the Gov. owns all property and produces 95% of all goods. China used to be this way but is slowly “privatizing” or becoming more free.

Mixed Economies that are more like Free Markets Examples of Mixed Economies which are closer to a free market are: Hong Kong, Singapore, Great Britain and the U.S. Hong Kong and Singapore are actually closer to a true Free Market than the U.S. is.

Review Economic Systems Review Adam Smith And Billionaire