Economics Chapter 2

Chapter 2 Section1 Objectives: How are the three basic economic questions answered in traditional , command, and market economies? What are the roles of self-interest and incentives in a market economy? What types of mixed economies exist today?

What are the basic economic questions? What to produce? How to produce it? For whom to produce?

Types of Economic Systems Four types of economic systems: Traditional Command Market Mixed

Types of Economic Systems Traditional (Aborigines, Eskimos) Found in the past. What to produce-In a traditional economy, this is determined by tradition. Economic roles are passed down from parents. Fathers to sons, mothers to daughters. How to produce-This is determined by custom. When the leaves fall, we harvest. For whom to produce-Usually centered around traditional family and its tribe. Not global.

Types of Economic Systems Command (Middle Ages) What to produce, how to produce, and for whom to produce-all determined by government officials. Officials are called central planners. What are the advantages and disadvantages? Individuals have no say in this type of economy.

Types of Economic Systems Market Economies-United States, Canada, Australia. What to produce, how to produce, and for whom to produce-all determined by individuals. People can buy, sell, and produce anything they want. Is that true? No, what really controls what is sold, bought, and produced is the market. Market-free exchange of goods and services.

Market Economies Continued How does the market regulate economic activity? Adam Smith said that the Invisible Hand, or self interest regulates the economy. Self interest-Impulse that encourages people to satisfy their needs and wants.

Market Economies Continued Government interaction can hurt the economy when it places limits on production or taxes goods. Example: Pizza delivery. Why take the job? Benefit to you? Benefit to other people? What happens when limits are placed on pizza production? -Less tips because less people are eating. How do you decide what is in your self interest? -You respond to incentives: rewards or punishments that affect behavior. Example: Commission quotas in retail jobs.

Type of Economic Systems Mixed Economy-combines elements of traditional, market, and command economic models to answer the three basic economic questions. Three main categories of mixed economies: Communism (authoritative socialism)-Limits on amount of resources that can be used. Example-limit on the amount of trees that can be cut down Capitalism-Closest to a market economy. Individuals still make all the decisions, but there is some government interaction-taxes, safety regulations. Democratic Socialism-fits between communist and capitalist. Government may own some factors of production, key industries such as different utilities. -Good or bad? Type of economic system for many European countries. Which one would you want to live in?

Chapter 2 Section 2 Objectives: What are the basic principles of free enterprise in the United States? What are the two markets of the circular flow model? How does the circular flow model reflect exchange?

Features of the U.S. Economy What type of economy does the U.S. have? The United States has a free enterprise system. Free enterprise system-system under which business can be conducted freely with little government intervention.

Features of the Free Enterprise System Five Main Features of the Free Enterprise System that Individuals have a Right to: 1. Own private property and enter into contracts. -What is private property? -Example: Cars, houses, toys, ideas. -Contracts can be verbal or written. Both are legally binding. -Example: bills, buying cars, cell phones.

Features of the Free Enterprise System 2. Make individual choices-sell property, pursue jobs, make what you want, buy what you want. -Choices always have consequences. 3. Engage in economic competition. -Competition: the economic rivalry that exists among businesses selling the same or similar products. -Why is competition important?

Features of the Free Enterprise System 4. Make decisions based on self-interest: Voluntary exchange. -Remember, trade makes everyone better off. 5. Participate in the economy with limited government involvement and regulation. -Safety hazards, restrict discrimination, provides public services through taxation.

Economic Actors in a Free Enterprise System Three economic actors in a free enterprise system: Consumers-decide what to buy. Producers-decide what to sell. Government-regulates trade between consumers and producers. Economic Model: Circular Flow Diagram

Chapter 2 Section 3 Objectives: How do nations decide how to use scarce resources? What are the major goals of the U.S. economic policy? Why do economic goals sometimes conflict?

Using Resources How does a nation decide how to use economic resources? Representatives serve as policymakers and choose how to use scarce resources by setting goals.

U.S. Economic Goals Six Economic Goals of the United States: Freedom Efficiency Equity Security Stability Growth

U.S. Economic Goals Freedom-Free to make economic choices, spend money, job choice, save or invest money. Efficiency-Government tries to get the most out of its resources to help the economy. Equity-This is sometimes called economic justice. Government tries to make sure everyone shares the costs and benefits of the free enterprise system. Mainly done through paying taxes that support government services.

U.S. Economic Goals Security-This is a nation’s effort to protect its members from poverty, business and bank failures, and medical emergencies-anything that could harm the economic well being of the individual or nation. -Examples: FDIC, insurance, and unemployment benefits

U.S. Economic Goals Stability-The United States has two goals for stability: To have full employment-meaning that we will have the lowest possible unemployment in the economy. There will always be some unemployment because people are always changing jobs or getting laid off. Price stability-U.S. tries to keep the overall prices of the economy stable. Attempt to balance overall prices of the economy to keep them not too high or low. This does not mean the government does this with individual prices.

U.S Economic Goals Economic Growth-Government tries to increase production for each worker. An increase in production of goods and services will increase the overall standard of living for the U.S.

Key Points Government must assign priorities to try and figure out what goals are most important. We do the same in our own lives. Priorities can change over time. Priorities can conflict-people have different opinions on what should be a priority. Sometimes solutions can conflict. Even if we agree on what should be a priority, we can disagree on how that goal should be achieved.