© SOUTH-WESTERN  12.1 Students understand common terms & concepts and economics reasoning. Standard Address Objectives  Identify the three questions that all economic systems must answer.  Describe a pure market economy, and identify its problems.  Describe a pure centrally planned economy, and identify its problems.  Compare mixed, transitional, and traditional economies.

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CONTEMPORARY ECONOMICS: LESSON 2.13 CHAPTER 2 Economic Systems and Economic Tools Economic Questions and Economic Systems Production Possibilities Frontier Comparative Advantage

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 2.14 CHAPTER 2 Economic Systems and Economic Tools  Why are economies around the world growing more market oriented?  How much can an economy produce with the resources available?  Can you actually save time by applying economic principles to your family chores?  Why is experience a good teacher?  Why is fast food so fast? Consider

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 2.15 LESSON 2.1 Economic Questions and Economic Systems  economic system  pure market economy  pure centrally planned economy  mixed economy  market economy  transitional economy  traditional economy Key Terms

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 2.16 The Three Economic Questions  All economies must answer three questions: What goods and services will be produced? How will they be produced? For whom will they be produced?

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 2.17 The Three Economic Questions  An economic system is the set of mechanisms and institutions that resolves the what, how, and for whom questions.  Some standards used to distinguish among economic systems are: 1.Who owns the resources? 2.What decision-making process is used to allocate resources and products? 3.What types of incentives guide economic decision makers?

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 2.18 What Goods and Services Will be Produced?  All economies must decide what Goods and Services Will be Produced.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 2.19 How will Goods and Services Will be Produced?  Economic systems determine how will Goods and Services Will be Produced.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON For Whom Will Goods and Services Will be Produced?  The economic system must determine for whom the goods and services will be produced?

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Interdependent Questions  Answers are interwoven What goods and services will be produced? How will they be produced? For whom will they be produced?

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON What three questions must all economic systems answer? What goods and services will be produced? How will they be produced? For whom will they be produced? Checkpoint Pg. 35

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Pure Market Economy  In a Pure Market economy –  There is no government at all  Coordination of economic activity is based on the prices generated in free, competitive markets.  Any income derived from selling resources goes exclusively to each resource owner.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Invisible Hand of Markets  All resources are privately owned and owners are free to supply those resources to the highest bidder.  Market prices guide resources to their most productive use and channel goods to those consumers who value them the most.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Invisible Hand of Markets  Adam Smith (1723–1790), This economists wrote a book titled “Wealth of Nations” it is the first book of modern political economy.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Invisible Hand of Markets  According to Adam Smith, although each individual pursues his or her self- interest, the “invisible hand” of market competition promotes the general welfare.  Voluntary choices in competitive markets answers the questions WHAT, HOW, & for WHOM

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Problems with Pure Market Economies  Difficulty enforcing property rights  Examples  Bootleg  Movies  CD’s  Software programs  Knock offs

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Problems with Pure Market Economies  Some people have few resources to sell

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Problems with Pure Market Economies  Some firms try to monopolize markets

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Problems with Pure Market Economies  No public goods  Private firms would not provide for national defense.

© SOUTH-WESTERN  Externalities  Some production and consumption affects third parties – does not directly involved. Problems with Pure Market Economies CONTEMPORARY ECONOMICS: LESSON 2.121

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON What is pure market economy, and what are its problems?  A pure market economy is an economy that runs strictly through capitalism.  There is no government intervention, and private ownership of all resources, and price of all goods are determined in a free competitive market through consumer choice.  The problems with a pure market economy is  There is difficulty enforcing property rights  Some people have few resources to sell  Some firms try to monopolize markets  There are no public goods  There are externalities Checkpoint Pg. 37

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Pure Centrally Planned Economy  All resources government- owned

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Pure Centrally Planned Economy  Production coordinated by the central plans of government  Sometimes called communism

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 2.1 Visible hand 25

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Pure Centrally Planned Economy  Use visible central planners  Centrally planned economies use the visible hand of central planners.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Problems with Centrally Planned Economies 1.Consumers get low priority  When goods are rationed or offered for an inflexible price, severe shortages can result. 2.Little freedom of choice 3.Central planning can be inefficient 4.Resources owned by the state are sometimes wasted 5.Environmental damage

© SOUTH-WESTERN Planned Economy / Communist  Morris, a Russian man saves his rubles for twenty years to buy a new car. After choosing the model and options he wants, he's not the least bit surprised or even concerned to learn that it will take two years for the new car to be delivered.  He thanks the salesman and starts to leave, but as he reaches the door he pauses and turns back to the salesman "Do you know which what “day” two years from now the new car will arrive?" he asks.  Visibly irritated, the salesman flips through his papers and says sharply that it will be in the afternoon, two years from now on Thursday.  "That's a relief!" says Morris. "The plumber is coming that morning.” CONTEMPORARY ECONOMICS: LESSON 2.128

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON What is a pure centrally planned economy and what are its problems?  A pure centrally planned economy,  All resources are government owned, and  Production is coordinated by the central plans of government.  The problems with centrally planned economies are: 1.Consumers get low priority 2.Little freedom of choice 3.Central planning can be inefficient 4.Resources owned by the state are sometimes wasted 5.Environmental damage Checkpoint Pg. 38

© SOUTH-WESTERN30 Mixed Economy  United States is a mixed economy.  It is also considered a market economy.  Market economies coordinate production through the invisible hand of market competition.  Government regulates the private sector in a variety of ways.

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© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Transitional Economy  A transitional economy is in the process of shifting orientation from central planning to competitive markets.  It involves converting state-owned enterprises into private enterprises— privatization.  The transition now under way will shape economies for decades to come.

© SOUTH-WESTERN Transitioning States (former communist states) 33

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Traditional Economy  A traditional economy is shaped largely by custom or religion.  Family relations also play significant roles in economic activity.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Compare mixed, market, and transitional economics?  A market economy is a comparative market that is run strictly through private ownership of goods and the consumer demand for those goods.  A mixed economy is comprised of both a market economy and a central planning economy.  Transitional economies are markets that are in the process of shifting from publicly owned enterprises to private enterprises. Checkpoint Pg. 40