Ch 2 Economic systems and tools

Three economic Questions What? How? For Whom?

Pure Market Economy Private firms account for production Adam Smith Invisible hand of the Market No Government regulation

Problems with market economy Difficulty enforcing property rights No government to enforce regulation Some people have less Monopolization No public goods Externalities- such as regulating pollution Economic Fluctuations

Pure Command Economy Central Planners Everything State controlled

Problems with Command Economies Consumers get low priority Little Freedom of Choice Central Planning Inefficient Wasted Resources Environmental Damage No Role for Entrepreneurs

Mixed Economy Market Economy Government regulates private sector

Transitional and Traditional Economies Transitional- moving from Command to Market Traditional- adheres to customs and traditions

Production Possibilities Frontier PPF Model Resources employed efficiently Maximum output Focused on resources allocated to Consumer goods and capital goods (such as pizza and pizza ovens)

Shifts of the PPF Changes in available resources Increase in Stock of Capital Goods Technology Change Improvement in Rules of the Game

Comparative Advantage Absolute Advantage- produce using fewer resources Law of Comparative Advantage- Specialization Gains from Specialization Exchange- Barter or Money

Specialization Division of Labor- Workers specialize in a specific task Works well with comparative advantage based on skill/ ability