3 Questions & Economic Systems AP Microeconomics

Need for Economic Systems Scarcity necessitates choices, how society organizes itself to address this problem is known as its economic system. Every economic system must make these choices or answer these questions: – What to produce? – How to produce? – For whom to produce? most controversial and the one question that you will now confront . . .

Who Gets the Candy Bar? Let’s brainstorm ideas on how to determine who will get the candy bar…

Economic Growth Increased production of goods and services over time Measured by changes in the level of real Gross Domestic Product Standard of living: health, literacy, life expectancy, etc.

Sustainability Everything that we need for our survival and well-being depends, either directly or indirectly, on our natural environment

Economic Equity Some measure of fairness Overall distribution of income Equal opportunity or equality of outcomes

Economic Freedom Freedom of consumers to decide how to spend or save incomes Freedom for workers to change jobs or join unions Freedom for people to establish new businesses or close old ones

Economic Stability/Security Stable prices (avoid inflation or deflation) and full employment (using all of an economy’s scarce resources, particularly labor) safety net: social security, welfare

Economic Efficiency Minimize waste Produce the goods and services people want most Economize resources in production of goods and services so real costs of production are as low as possible

What’s Your Priority? Category Class Total Freedom Growth Stability Equity Efficiency Sustainability

So, Who Gets the Candy Bar? Allocation Mechanisms Lottery First come Market/Price Command/Planner Force Share Need

Three Fundamental Resource Allocation Methods → Economic Systems Traditional Market Planning

Traditional Economies

Economic System: Rules about how resources are allocated in a particular country or group of people. Market Economy: An economy that relies on a system of interdependent market prices to allocate goods, services, and productive resources and to coordinate the diverse plans of consumers and producers, all of them pursuing their own self-interest. Command Economy: An economy in which most economic issues of production and distribution are resolved through central planning and control.

The Market Economy Voluntary exchange between buyers & sellers The Three Questions Answered: Buyers determine the WHAT? Sellers determine the HOW? Income depends on production the For WHOM? Prices are the signals or communication tool

Characteristics of a Market Economy Private property Freedom of enterprise and choice Motive of self-interest Competition System of markets and prices Limited government Rule of law Private property: factors of production owned by private individuals and private institutions rather than the government Freedom of enterprise and choice: entrepreneurs are free to obtain and organize resources to produce and sell goods and services. Consumers are free to purchase goods and services to best satisfy their wants. Workers are free to pursue any job for which they are qualified. Motive of self-interest: entrepreneurs seek profits, consumers seek satisfaction from their use of goods and services, workers seek the highest wages possible. Competition: sellers compete on the basis of price, service and product quality. System of markets and prices: markets bring buyers and sellers together and interact with one another with the buyer wanting to get the item at the lowest price and the sellers wanting to sell at the highest price. Limited government: competitive markets promote the efficient use of resources. Government does not allocate resources, goods or services. Rule of law: laws exist, are written down, are fair, are followed by EVERYBODY

The Centrally-Planned (Command) Economy Economic decisions made by Government The Three Questions Answered: Central Planners decide the WHAT? Central Planners decide the HOW? Central Planners decide for WHOM? Prices are set by planners

Characteristics of a Command Economy Turkmenistan Public ownership Centralized decision making Economic planning Allocation by command Cuba North Korea Iran Libya Burma Community property: community ownership of factors of production, not private. Planned economic activity: production is planned by a central planning unit and resources are assigned as needed. Burma, Cuba, Iran, North Korea, Turkmenistan, Belarus.

http://www.mbaknol.com/category/global-business-environment/

Entrepreneurship in the US Economy Student Readings p. 20

In Reality all Economic Systems are a MIX or Mixed Model System …but are based on either a Command basis or Market basis Early 1980s Hong Kong N. Korea Poland France Cuba China USA UK Centrally Planned Free Market Early 2000s UK Cuba China USA Poland France N. Korea Hong Kong

Command, Free, or Mixed Market? Minimum wage laws are created. The economic planning function is centralized. The government sets quotas for production. Consumers buy goods, and producers raise prices in response to greater demand.

Command, Free, or Mixed Market? New suppliers in India sell products in the United States at a fraction of the price of American producers. Workers have a lifetime job. Prices are determined by a third party agency. Self interest is the driving force.

How do Market/Command systems prioritize the goals? Category Market system Command system Freedom Growth Stability Equity Efficiency Sustainability