Economic Efficiency No missed opportunities Productive Efficiency No way to make some people better off without making some people worse off Productive Efficiency Operating on the PPC Full employment of resources Allocative Efficiency Consumers as well off as possible Producing the goods wanted by society Marginal Benefit = Marginal Cost

Economic System Traditional Command Market

Basic Questions each system must answer What is produced? How is it produced? For Whom is it produced?

Traditional Economies Economic decisions generally repeat those made in earlier times or by previous generations Continuity is valued Native/Primitive societies, Amish

Command Economies Economic decisions are made largely by an authority such as a feudal lord or a government agency. Planners decide what to produce. Cuba, North Korea, Fascist Italy, Nazi Germany, Soviet Union, China under Mao

Market Economies Individuals and businesses make the main economic decisions. Price system serves as the communication system between buyers and sellers. United States, Western World

Economic System MIXED Traditional Command Market

Economic Goals Criteria for Comparing Economic Systems Goals of the U.S. Economy Full Employment Act of 1946

Economic Growth Increase in the production of goods and services. Why do we want it Growing Population Increase in the Standard of Living TV’s? Measure: GDP – Gross Domestic Product (REAL) GDP chart (ESBR) World GDP

Increase in Standard of Living “What Americans Need” Pew Research Center Item 2006 1996 Car 91% 93% Clothes Washer 90% 86% Clothes Dryer 83% 62% Home Air Conditioning 70% 51% Microwave 68% 32% Television 64% 59% Car Air Conditioning 59% 41% Home Computer 51% 26% Cell Phone 49% N.A. Dishwasher 35% 13% Cable or Dish TV 33% 17%

Standard of Living Item Have it Necessity Television 98% 64% Car 92% 91% Microwave 86% 68% Home Air Conditioning 85% 70% Clothes Washer 82% 90% Cable or Dish TV 82% 33% Clothes Dryer 79% 83% Cell Phone 74% 49% Home Computer 73% 51%

Full Employment Economy Maximizes use of Labor Labor resources cannot be “saved” Jobs/work are the foundation of production and consumption in an economy. Unemployment Rate Graph: Unemployment rate (seasonally adjusted) World unemployment rates

Price Level Stability Economy is not subject to fluctuations in prices Instability leads to Uncertainty Inflation and Deflation are both bad things CPI – Consumer Price Index Graph: Consumer Price Index for All Urban Consumers: U.S.City Average, All Items and All Items Less Food and Energy

Economic Freedom Who makes the Economic Decisions? Democratic Ideals Closely Related to Efficiency and Growth Rate of Taxation The Index of Economic Freedom

Economic Efficiency Productive Efficiency Allocative Efficiency Wise use of resources. Conservation & Productivity Idle or Wasted Pollution – Negative externality Graph: productivity

Economic Equity (distribution of income) Fairness or Justice What is Equity? Equal opportunity or Equal results Distribution of Wealth Poverty Rates Forbes 400 Lorenz Curve

Poverty Thresholds 2008 Children Size of <18 Household 1 2 3 10,991 14,417 14,846 16,841 17,330 17,346 4 22,207 22,570 21,834 21,910 5 26,781 27,170 26,338 25,694 6 30,803 30,925 30,288 29,677

http://www.nationmaster.com/ Forbes

Economic Security Citizens have a minimum standard of living that they can reasonably expect. Government programs Social Security Welfare Unemployment Health Care Minimum Wage

Balance of Trade Trade allows countries to benefit from the resources and skills of other countries Specialization and trade raises standards of living Trade should be close to balanced

Top Trading Partners 2009 (thru Nov) Country Exports Imports Total Percent Canada 186.5 203.6 390.1 16.5 China 61.2 269.9 331.1 14.0 Mexico 117.2 159.5 276.7 11.7 Japan 46.2 86.4 132.7 5.6 Germany 39.3 64.3 103.6 4.4 U.K. 42.0 43.5 85.5 3.6 S. Korea 25.8 35.8 61.7 2.6 France 24.3 31.1 55.4 2.3 Netherlands 29.7 14.8 44.4 1.9 Taiwan 16.4 25.7 42.2 1.8

Goals that Work Together Freedom – Growth Efficiency – Full Employment Freedom – Efficiency Stability – Security Equity (results) – Security Equity (opportunity) - Freedom

Goals that Conflict Freedom – Security Growth – Stability Freedom – Stability Equity (results) – Equity (opportunity)