Today’s Objectives  Introduce Chapter 3 – Markets  You will… Have a better understanding of PPF and productivity Study for your quiz next class (summative grade) Understand the 3 types of markets and how they operate within a society

CHAPTER 3

5 Fundamental Questions of All Economic Systems  What goods and services will be produced? ○ Limited by scarcity of resources  How will the goods and services be produced? ○ Limited by the human capital and capital available  Who will get the goods and services? ○ How do you decide who “deserves” it?  How will the system accommodate change?  How will the system promote progress?

Scenario: What Would You Do?  What goods and services will be produced? ○ Of the following, which will you produce for your people? Choose ONLY 4 Local Defense, Food, Healthcare, Clothing, Technology, Transportation, Public Schooling, National Defense  How will the goods and services be produced? ○ Who will produce it? The People or the Government?  Who will get the goods and services? ○ Prioritize the following groups and why they get it first. ○ Rich, Middle Class, Poor, Adults, Children, Sick, Healthy  Create your “Island” and explain how your society would work.

What are the goals of choosing an Economic System?  6 Major Goals to Achieve ○ Have to pick though, impossible to achieve all ○ Can’t be equal and freedom – work against each other  Econ. Freedom  Econ. Efficiency  Econ. Equality  Econ. Growth  Econ. Stability  Econ. Security

What are the goals of choosing an Economic System?  Economic Freedom – all people have full freedom of what to make and buy or sell without government interference Usually a goal, but tough to achieve fully People want protection from violators and government expected to do this  Economic Efficiency – economy strives to not waste ANY of its resources Includes all natural and human resources Has a goal of FULL EMPLOYMENT – no waste

What are the goals of choosing an Economic System?  Economic Equity – strives to give all in society an equal amount Problems arise with what is equal? ○ Does everyone get a little? ○ Do the rich or the poor receive more?  Economic Growth – strives to produce more and better goods Usually a goal of all economic systems

What are the goals of choosing an Economic System?  Economic Security – strives to support those in society who cannot provide themselves Includes the too young or old, sick or dying, etc.  Economic Stability – strives to keep the economy stable and running well Keeps things predictable; having goods, water, electricity, jobs and prices relatively consistent

What is an Economic System?  Economic System – how a country decides to create, buy and sell products and resources  Three Major Economic Systems Traditional/Subsistence – rare; usually found in clan/nomad life ○ American Indian Tribes, African Tribes Socialism and/or Communism - USSR Free Market or Capitalism – USA, Europe ​

Where are the people in each cartoon? Who or what decides what consumers get in Cartoon A? Cartoon B? What advantages and disadvantages do you see represented in Cartoon A? Cartoon B? Which store would you prefer to shop in, and why?

Command Economy  Socialism or Communism  All Fundamental Questions answered by a government bureaucracy. ○ Government commands what is created and how much  A central plan was created to determine the parameters of the economy. ○ Limits flexibility of products and creates shortages

Failure of the Command Economy  Coordination of economy was a HUGE job ○ Must plan for EVERY product a nation needs  No accurate measurement of success ○ No incentive to produce faster or better ○ No chance to improve by showing your productivity  Mistakes were made  Problems in supply of one product could adversely affect other products (lack of substitutions)

The Market Economy  Capitalism  Private ownership of resources  Markets determine economic activity (i.e. “supply and demand”)  Consumers themselves answer some of the fundamental questions  Government plays a role – regulation, encourage competition and fairness, but not direct role in setting prices.

NORTH KOREA EXTREMELY RESTRICTED BY THE GOVERNMENT HONG KONG EXTREMELY FREE FEW REGULATIONS

“The Invisible Hand”  Idea created by Adam Smith in his book The Wealth of Nations (1776) Adam Smith is the “father of Economics”  People’s self-interest actually benefits the social interest without the person knowing ○ An actual “invisible hand” running the economy ○ Coordinates needs even if you’re being evil Meaning selfishness still helps to run the economy  Competition results in maximization of profits at lowest possible cost to consumers  60 Second Lessons in Economics 60 Second Lessons in Economics

Incentives in a Market Economy  Hard work, skill, innovation = more sales, more profit ○ Potential personal gain may result in better life  Assuming of risk is encouraged = desire for greater wealth  Freedom of choice – further own self-interest through choices made in the market.  Private Property – ideas and goods are yours; not owned by the government

Private Property  What is your definition of private property?  The right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital and other property  What are the advantages of an economic system which allows people to own property?  Encourage investment, innovation, exchange, maintenance of property, and economic growth.