 Utopia – › utopia means “no place” in Greek – for good reason  in real world, scarcity is a fact of life  3 Key questions: › 1. › 2. › 3.  Answers shape an economic system

 Is the way a society uses its scarce resources to satisfy its people’s unlimited wants  3 basic types of economies › 1. › 2. › 3.

 System in which  The one goal of the society is survival  The good of the group takes precedence over individual desires  Everyone in the society has a set role – men, women, and children

 The govt. decides  Govt. officials consider the resources and needs of the country and allocate according to their judgment  Wants of the individual are rarely considered  Govt. usually › eg. – North Korea and Cuba

 Is based on individual choice, not govt. directives  Consumers and producers drive the economy  Consumers –  Producers –  Make choices about limited resources to make most money possible  Individuals act in own self-interest, but also benefit others › a consumer choice benefits a producer because they earn money from purchase › lending an invisible hand to promote the interests of others

-earliest times – all societies had this – but inefficient and do not adapt to change

 Advantage – › produces what best ensures survival › methods of production are the same as they always have been › system of distribution are determined by custom and tradition  Disadvantage › resist change › less productive then if adopting new approaches › defined roles eliminate conflict –  people in wrong job are less productive  lower productivity means people do not acquire material wealth  people have lower standards of living

 Traditional economies under pressure to change  Kavango people in Namibia, Africa – subsistence farmers › see images of world outside their land › the young than want more from life and leave the villages › some people have changed to commercial farming

 Leaders decide what and how it should be produced › also for whom it should be produced by setting wages › by setting wages, you decide who can buy what products  Centrally planned economy –

 How govt. affects us: › work – › states – › local law –  Suppose: › bureaucrats could decide which business can operate in your town › also decide what should be produced, how much should be produced each month, also who can have jobs and their hours and pay scale

 Modern societies with command economies influenced by Karl Marx › Marx –  struggle between factory owners and workers  owners get rich, workers stay poor  predicts workers overthrow owners and put factories into public hands  class struggle over and all share in wealth

 – economic system in which the govt. owns some or all of the factors of production  – more extreme form of socialism, no private ownership of property and little or no political freedom  – requires absolute obedience to authority  – established through democratic political process – no violent overthrow › govt. owns the basic industries, other industries are privately owned › decisions made for govt. industries, maybe for some other sectors – health care

 Marx born in 1818 Germany, middle class family › exiled from country due to radical political beliefs  Settled in London, met Friedrich Engels (son of factory owner) › learned of the struggled of the worker – took up study of economics › Ind. Rev. had created system of wage slavery

 Said factory owner treated workers as another commodity to be bought › use labor to make products › make a profit by selling products at higher price than cost of labor and resources › keep wages low and make more profit › exploitation of the worker

 Rising tension between owners and workers inevitable › over time, more wealth in fewer hand, more dissatisfied workers – revolt  1848 –  Further discussion in his study –

 Because of the way communism worked in practice and the fall of communism in early 1990s, his ideas have fallen into disfavor – but still had a huge impact on economic and political thinking

No pure command economies today North Korea – mostly command economy

 Split after Korean War –  Govt. controlled all economic decision – › diverted most resources to military – late 1990’s and early 2000’s many die from hunger & malnutrition due to lack of food › many survive because of food aid from other countries  Failure to provide food and other products is the result of a flawed economic plan › much of 1990s, NK produced less and less – economy shrunk › since 2003 – relaxing of restrictions on private ownership and market activity

Disadvantages Advantages to Command Economies  Provide for everyone (sick and old)  Can produce items that may not make money in market economy (medicines)  Central planners have little understanding of local conditions  Decisions often misguided or wrong › workers have little motive to improve productivity (paid the same no matter what) › no motivation to use resources wisely (no private property)

 Often set prices below that of a market system › shortages – › light bulbs in factories  Greatest failure – › individual rights are subordinate to the needs of the state – even right to life › millions die on collective farms in China and Soviet Union › command economies responsible for death of more people than 2 world wars

 Several distinct characteristics › from self-interest  Private property rights –  Property – › factories, offices, house, car, intellectual property (songs, ideas)  Market – › farmers market, internet

 For markets to work efficiently, private property rights need to be well defined and actively enforced  Need to be sure that the seller owns or has the right to be selling said product

 Some govt. role is to stay out of the marketplace  Laissez faire – › principle that govt. should not interfere in the economy › often paired with capitalism  Capitalism – › foundation for market economies › operate on idea that producer will create goods and services that consumers demand  Laissez faire capitalism – › market economy in pure form  No pure market economies – real world – some level of govt. involvement

 Voluntary exchange – a trade in which the parties involved anticipate that the benefits will outweigh the costs › believe what they are getting is worth more than what they are giving up  Market economy – most trade is based on exchange of a product for money › self-interest guides voluntary exchange  Profit – a financial gain from a business transaction

 Competition – the effort of two or more people, acting independently, to get the business of other by offering the best deal › similar products – decide which based on whatever combination of price and value appeal to you  Consumer sovereignty – is the idea that because consumers are free to purchase what they want and to refuse products they do not want, they have the ultimate control over what is produced › no competition – brand name produces charge higher prices › competition – acts as a control on self-interested behavior, guiding the market toward › a balance between higher value and lower prices  producer must work to please the consumer while pleasing themselves

 Specialization – › trade what they can most efficiently produce for goods and services produced more efficiently by others › removes need for households to be self- sufficient › markets allow households to trade

 Circular flow model – › represents 2 major decision makers in a market economy  households  businesses › show 2 markets where households and businesses meet  that for goods and services  that for resources

Product Markets Factor Markets  Product market – › a set of activities › whenever or wherever individuals purchases goods or services › suppliers of product market are business – offer goods/services for money – money › keep business going  Factor market – › individuals own all the factors – some directly, some indirectly (stockholders) › businesses are customers and individuals are producers

 use figure 2.4 to illustrate › green arrows – flow of money in the product market › blue arrows – flow of resources and products in the product market

Advantages  Nov. 9, 1989 Berlin Wall fell and thousands of E. Germans came to the west, why?  Economic and Political Freedom › freedom – chief advantage › requires that individuals be free to make own economic choices – determines what will be produced  Also free to develop interests and talents in work produced

 Political process is much freer › diversity of viewpoints and open elections › bureaucracy less cumbersome and costly › responsive to change and can accommodate change  Individuals in local communities free to make their own economic choices w/o govt. interference › better knowledge of area leads to better econ. decisions and greater productivity  Profit – › serves as reward for hard work and innovation › more good ideas equal more money  Encourages competition – consumers have final say › higher quality products at lower prices › helps create a diverse product market

 Pure market economy –  No mechanisms for providing public goods and services – would not be profitable  Cannot provide security to those who cannot be economically productive  Cannot prevent the unequal distribution of wealth › ex. Econ boom of 1800s to 1900s in the US › a few became very rich – workers had low pay › industrialized societies adopt some form of govt. involvement › mix elements of command and market

 Farm family in Midwest US › harvest time custom – › roads, public high school, minimum wage, Social Security checks – › private property, entrepreneurship of family, competitive market, voluntary exchange labor for wages –

 All economies are mixed, but often emphasize one type of system › US economy – market dominant › many European countries – more even mix of market and command

Sweden – -govt. & govt. related organizations own about 1/3 of all companies -cradle to grave social benefits -child care, schooling through college, health care, dental, paid time off to raise families, old age pension  France – › govt. ownership of core industries › 1980s – dissatisfaction – privatized industries (banking & insurance) › controlling interest in other industries – energy, auto, defense, transportation › provides social services – health care and education  Namibia – › since 1990s – encouraging a more market driven approach

-economies have changed, and are always changing in response to changes in natural, social, and political conditions

 Nationalize – › after WWII – many govt. became more centrally planned – nationalized industries – coal, steel  Privatize – › recently – economies moving away from command systems › Poland – from command to market › since 1990s – privatized manufacturing, construction, trade, service › hope private would provide incentives for greater efficiency – economy grow

 One way to privatize – open to foreign investors  Global economy – › America – actors in a world economy › more foreign trade than ever before › depend on foreign products and foreign markets which sell products  reason for economic globalization › opening up of world markets to trade › agreements between nations so trade flows smooth and free › development of faster, safer, cheaper transportation  goods moved around the world inexpensively › telephone and computer linkages make financial transactions quick, cheap and easy › enhanced cross-border relationships – US & Japan – Ford & Mazda  Shared efforts leads to greater efficiency - lower production costs and higher profit  Partnerships grow out of need to share costs of researching and developing new tech.