Key Terms Review Economic System: The method that a nation uses in seeking to satisfy its needs and wants Standard of Living: The measure of how well a society satisfies its needs and wants. Markets: A place where a transaction takes place between a buyer and a seller.

New Key Terms Centrally planned: A socialist economic system in which the government makes most important economic decision. Free market: A capitalist economic system in which most economic decisions occur as a result of transactions in markets Mixed market: A capitalist economic system in which many economic decisions occur as a result of transactions in markets subject to government regulations

Key Terms Consumer sovereignty: The idea that the consumer in a free or mixed economic system determines which goods and services are produced by voting with their money. Capitalism: Those economic systems based upon the principles of private property rights, the rule of law, the free transaction, and entrepreneurship. Socialism: The belief that the government should make many important economic decisions.

Key Terms Public Goods: Shared goods and services that can most efficiently be provided by the government. Free Rider: Someone who would not chose to pay for a benefit that they would get anyway. (National defense)

What are the three economic systems?

Examples of the Three Types Central Planning: Cuba and North Korea Free: Hong Kong Mixed: The United States and Spain

Definitions of the Three Types of Economic Systems Centrally planned economies: System in which the government makes most economic decisions Market economy: Systems where decisions related to production and consumption on based on voluntary exchange in a market Mixed economies: a market based economic system with limited government regulation

Reality The overall picture is of a range of systems depending on the degree of government control that has North Korea at one extreme and Hong Kong at the opposite extreme All nations depending on the degree of economic freedom permitted fall within the range between these two nations. For example the United States and Spain would be closer to Hong Kong while India and Vietnam would be closer to North Korea

The three questions each must answer What are we going to make? How are we going to make it? Who gets to consume it?

How do these systems answer these questions? In market economies, the market (transactions between buyers and sellers), money is the answer. In centrally planned economies, the government or its agents answer these questions.

The Nature of the US Economic System The United States Economy is based upon a market economic system that recognizes the need for government regulations

Examples of Regulation in the US Restrictions on what can be sold and by whome such as prescriptions and “controlled substances” Restrictions on starting businesses such as licensing and zoning restrictions Taxes on certain items such as tobacco and liquor Age restrictions

The general answers in the US to these questions What…we will make the items that provide the greatest profit/satisfaction. How….The way that is most efficient to maximize profit/satisfaction Who ….To the person willing to pay the most

There are exceptions however… In most cases the answer is money” and the means is the free market. There are exceptions. For example in arranging organ transplants. We do not allow the buying or selling of organs and we do not allow the market or price to allocate who gets this scarce resource.

Capitalism versus Socialism

Capitalism Capitalist economic systems believe that the market is the best place for making the important economic decisions

Socialism Socialist believe that the market cannot be trusted to make these decisions and that the government therefore should make many if not all of the important economic decisions

The Reality is that There is a continuum or range of economic beliefs regarding how many of the decisions should be left to the markets and how many should be made by a central authority such as the government

The more you believe the decisions should be left to the markets, the more capitalist you are. The more you believe the decisions should be left to the government the more socialist you are.

Capitalism Those economic systems based upon four important principles…

Private Property Rights The right of individuals to own and control their own possessions.

Free Transaction The belief that transactions should be satisfactory to both parties and entered into freely.

Entrepreneurship The right of individuals to profit by taking a risk in starting a business.

Rule of Law The belief that the laws must be applied equally to all citizens including those who govern.

Obama and Rule of Law Obama frequently talks about the Rule of Law During the past 3 years however he has constantly violated this principal Some of his critics compare him to a king or a dictator because he claims the power to make exceptions to the rule of law for certain groups or individuals.

Are some Americans more equal than others?

GM When GM went bankrupt Obama made “exceptions” to the bankruptcy law that favored certain groups such as the unions Creditors who had loaned money to GM thinking they were protected by the law found out they were not protected by Obama.

The result… The company’s past shareholders lost their stock The creditors got very little for their loans The government and unions walked away owning the new company refinanced with taxpayer money

Obamacare

Under Obamacare, Americans are required to purchase healthcare… Unless they get a waiver from the President

No Child Left Behind Last week President Obama, citing a failure by Congress to act, announced a procedure for handing out waivers for the federal mandates under the No Child Left Behind law. Unfortunately, these waivers come with a series of new federal rules, this time without congressional approval, and would make the secretary of education the equivalent of a national school board.

In the future however… Will bankers and investors be as willing to loan money to company’s in danger of going bankrupt. Not if their loans cannot be secured and protected by the rule of law.

Privacy Obamacare will require all health providers to turn over copies of your health records to the gov. Yet Obama has sealed his school and other personal records

Public Goods Sometimes a society recognizes that its best if the government, not the market place provides a good or service. For examples, postal service, national parks, public education, motor vehicles, and the military.

Public goods What would be the problem in having national defense provided by private businesses? Would we have a similar problem with regards to fire, police, public education etc?

Markets and free loaders What incentive do businesses have in providing products? Why is the ability to free load on a good or service a disincentive to produce that good or service?

Opportunity cost Increasingly government has been looking for ways to generate revenue from public goods

Highway 680 Why did CA add another lane to southbound highway 680? What is required to go in this lane during “peak hours” Why would people pay to use a road otherwise free? How is CA dealing with “free loades”?

Paper Airplane Activity

Specialization How did we use paper airplanes to illustrate the advantage of specialization?