Target #4: Fundamentals of Economics Students can describe Market, traditional, command and mixed economies. Students can compare the benefits and problems associated with each of these economies.

Look at the cartoon to the right and try to make some assumptions about the economic system these people are living under. Then try to answer the questions on your notes sheet. In a couple minutes a second cartoon will be shown.

How is this cartoon different from the previous image?

Warm UP: Answer these questions about the cartoons Warm UP: Answer these questions about the cartoons. • Where are the people in each cartoon? • How would you describe each scene? • Who or what decides what consumers get in each cartoon? • What advantages and disadvantages do you see represented in each cartoon? • Which store would you prefer to shop in, and why?

3 Key Economic Questions Resources are scarce everywhere, so society must answer 3 economic questions: What goods and services should be produced? Each society must decide what to produce in order to satisfy the needs and wants of its people. Because resources are limited, each decision society makes comes at an opportunity cost. How should these goods and services be produced? Each society must decide how to produce goods and services.

Who consumes these goods and services? All require land, labor, and capital. Who consumes these goods and services? Society makes decisions how goods are services are consumed. Factor payments are the income people receive in return for supplying factors of production (land, labor or capital) Factor payments also include the profits entrepreneurs earn if their enterprises succeed The way a society answers these questions defines its economic system. An economic system is the structure of methods and principles a society uses to produce and distribute goods and services.

Economic Goals and Societal Values Economic Efficiency Because resources are always scarce, societies try to maximize what they can produce using the resources they have. Societies need to accurately assess what its people want or run they run the risk of wasting resources. An economy that cannot deliver the right goods in the right quantity to the right people at the right price is not efficient. Economic Freedom

Most people value the opportunity to make their own choices. In the U.S. we prize the freedom to buy what we can pay for, to seek work where we want, to own property, and to become entrepreneurs. Economic Security Economics systems seek to reassure people that goods and services will be available when needed and can count on receiving expected payments on time. Many governments provide safety nets or a set of programs to protect people. What are some of those safety nets we have?

Economic Equity Economic Growth Each society must decide how to divide its economic pie. Should everyone get the same share? Should one’s consumption depend on how much one produces? How much should society provide for those who are unable or unwilling to produce? Economic Growth A nation’s economy must grow if people are going to have more income. When that occurs, the nation improves its standard of living or level of economic prosperity. Innovation plays a huge role in economic growth.

Warm Up What comment is this cartoon making? Is it pro or anti capitalist? What are the benefits of communism as shown in the cartoon?

Goals in Conflict A society may value other goals than these (environmental protection, full employment) Goals may be in conflict with one another. Example: when a society provides a safety net for all citizens, the added cost may slow down economic growth. Traditional Economies: relies on habit, custom and ritual to answer the 3 key economic questions. Revolves around the family unit. Work is divided along gender lines.

Found in communities that are small and close. People work to support the entire community. Agriculture and hunting lie at the center of people’s lives, laws and religious beliefs. Usually successful if they meet their own needs, but have a difficult time dealing effectively with environmental disasters. Slow to adapt new tech. Lack modern conveniences and usually have a low standard of living.

The Free Market Why Markets Exist Market: any arrangement that allows buyers and sellers to exchange things. Markets eliminate the need for any one person to be self-sufficient. Markets allow us to exchange things we have, for things we want. Each society must decide how to produce goods and services.

Specialization: the concentration of the productive efforts of individuals and businesses on a limited number of activities. Specialization leads to efficient use of capital, land and labor. Because they concentrate on one or a few tasks, they can do their work more efficiently, saving resources by avoiding waste. Buying and Selling Without specialization, markets would not be necessary. We need a mechanism to sell what we have produced and buy what we need (i.e. market)

Free Market Economy: the 3 economic questions are made by voluntary exchange in markets. (a.k.a. capitalist economy) The choices made by individuals determine what gets made, how its made and how much people can consume of the goods and services produced. Individuals and privately owned businesses own the factors of production. INDIVIDUALS answer the 3 economic questions.

Factor and Product Markets Households and Firms The participants in a free market economy are households and firms. Household: person or groups of people living in a single residence. Households own factors of production and are also consumers. Firm: organization that uses resources to produce a product or service, which it then sells. Households and firms exchange money, resources and products in the marketplace. Factor and Product Markets

Firms purchase or rent land, hire workers, pay them for wages while also borrowing money to purchase capital paying households interest or profits in return. Product Market: the arena of exchange in which households purchase goods and services from firms. Households purchase products made by firms with the money they received from firms in the factor market.

Warm Up What is happening here? What is the cartoonist trying to say? What is the invisible hand of the market? Which economic system is the cartoonist being critical of ? Warm Up

The Self-Regulating Nature of the Marketplace Competition and our own self-interest keep the marketplace functioning. Self-Interest Buyers and sellers only consider their own self-interest (personal gain). Self-interest is the push that leads people to act. Competition

Incentive: the hope of reward or fear of penalty that encourages a person to behave a certain way. Name incentives that encourage people to behave a certain way. (Think of both economical and non-economical incentives.) Consumers will respond to higher positive incentives (lower prices) Meanwhile, firms try to increase sales/profits. This struggle between the producers for the dollar of the consumers is called competition.

The Invisible Hand Advantages of Free Market Self-interest and competition work together to regulate the marketplace. How? Competition causes firms to produce more and moderate their desire to raise prices. ALL THIS HAPPENS WITHOUT THE PLANNING OR DIRECTION OF A CENTRAL FIGURE (I.E. GOVERNMENT) This self-regulating tool is called Invisible Hand. Advantages of Free Market Economic efficiency Economic freedom Economic growth Although there are a lot of advantages, no country today operates under a true unregulated free market system.

The hammer and sickle is the symbol of communism, which is an economic system in which the means of production are controlled by workers, rather than capitalists. The hammer represents industrial workers, while the sickle, used in the past to harvest crops, represents agricultural workers What does this cartoon represent? What is happening in China?

Warm Up What is socialism? What is Communism? What is the difference?

Centrally Planned Economies How Central Planning Works The government, rather than individual producers and consumers, answer the 3 key economic questions. The government owns both the land and capital (labor too, because they control where people work and how much they work for). A.K.A. Command Economies Oppose private property, free market pricing competition and consumer choice.

Socialism: describes a range of economic and political systems based upon a belief that wealth should be evenly distributed. So, the government needs to control everything. Considered a middle ground between communism and capitalism. Communism: governments owns and controls all resources and means of production and makes all economic decisions. Karl Marx: believed labor was the source of all value.

While countries with socialist/communist economies can be democratic, they’re often authoritarian. Typically limiting individual freedoms. Soviet Union The best land, labor and capital were used for the military. What suffered because of the choice of “guns”? China Government planners control many key decisions They do allow entrepreneurs far more economic freedom than in the past, which has boosted their economy greatly.

Mixed Economies Disadvantages of Centrally Planned Economy Economic Efficiency-no incentives for workers Economic freedom- discouraging competition Economic growth- no real innovation Economic equity-even though the goal is equity, it’s never really existed. Mixed Economies The Rise of Mixed Economies

Reasons for Government Involvement Laissez faire, the doctrine that favored NO government involvement in the market, was thought to give the greatest benefit. How would the free market provide for national defense or a highway system? What about students who could afford private education? Governments also protect property rights (5th and 14th amendments) Governments also regulate businesses to make sure that the info they are giving consumers is not misleading. Mixed economy: market-based economy where the government is involved to some extent.

Circular Flow Model of a Mixed Economy Government in a Factor Market Governments also purchase land, labor and capital from households in the factor market. The U.S. government pays 2.7 million employees $152.2 billion/year for their labor. Government in the Product Market Governments purchase goods and services from firms in the product market (for needs such as office supplies and materials to build things such as concrete and steel for roads).

Comparing Mixed Economies Transferring Money Money is transferred to businesses and individuals for a variety of reasons, such as saving a failing industry or making payments to disabled workers. Social Security Comparing Mixed Economies Mixed Economies Where Government Intervention Dominates North Korea- the government owns all property and all economic output as well as producing 95% of the countries goods.

Many nations that have relied on central planning in the past are now going through economic transition. Privatization is a large part of that economic transition. Mixed Economies Where the Free Market System Dominates Hong Kong- the private sector rules. Any problems with that? The U.S. Economy Free enterprise system: economic system characterized by individual or corporate ownership of capital goods.

Government Intervention Government plays a substantial role; keeps order, provides services and protects property What do we do about government regulation? More or less? Economic Freedom The U.S. enjoys a high level of economic freedom.