ECONOMIC SYSTEMS An organized approach to producing and distributing goods and services. Purpose is to make important decisions about the use and distribution of resources. All economic systems deal with the same problem SCARCITY unlimited wants vs. Limited resources

Economic Systems answers the problem of scarcity. Limited Resources > SCARCITY < Unlimited Wants

Scarcity forces us to make choices about… What to produce? How to produce? For whom to produce?

ECONOMIC SYSTEMS Market Economy/Private Enterprise Command Economy/Centrally Planned Economy Mixed Economy

MARKET ECONOMY (Capitalism) Decisions about scarcity should be made free from govt. control. Economic forces (price system/supply & demand) in the market should answer the three economic questions. In “laissez faire economics”, the government should adopt a “hands off” policy when it comes to economic decisions. Decentralized Private Enterprise Free Enterprise Laissez Faire Pure Price System Free Market

Market economy continued… Competition and profit motive find the most efficient and innovative methods of production. Values individualism and self-interest. Individuals can best achieve their goals if they are allowed to have private ownership. Dollar voting

Adam Smith Father of the market system. Published his ideas in his book called “The Wealth of Nations”. Believed the economy would regulate itself if left alone. (Laissez Faire) Believed those that fail to complete fail to survive. (profit motive) The “invisible hand” – the market will solve all basic economic questions. If consumers are sovereign supply and demand will dictate the natural flow of the market.

Imagine… We are trapped in this classroom for the next month. We must survive and “make do.” Think of all the things you would like to have with you during this month and consider what you would be willing to pay for these things. The catch: We can only make use of the things we have on our possession right now. Your task: Choose one item that you think other members of the class might be willing to purchase. Place this item on your desk with a posted price BE REALISTIC. People can only pay with the money they actually possess (what exists in their bank accounts).

SUPPLY & DEMAND Now that you know how other merchants priced their items how will it affect your pricing of the same items? Were there some items that would be in high demand because of their low supply? How might that affect pricing?

SUPPLY & DEMAND What happens when demand exceeds supply? What happens when supply exceeds demand? How does supply and demand affect choices such as… –Careers –Types of cars –Types of restaurants/food(I.e. Lobster) What are some recent examples of instances where demand exceeded supply? What were the results?

Advantages Market gives producer incentive Market provides incentive to hire skilled labor Wide variety of goods and services are available. Competition encourages good quality goods. Productivity is rewarded by profits Market economy fosters self-reliance. It is possible to become rich. Consumers can be manipulated by advertising. Prices and incomes may not reflect what is best for society. Boom & bust cycle Monopolies and oligopolies can emerge Extreme income inequality can exist. Environmental problems Job security Disadvantages

THE ROARING TWENTIES United States was the richest country in the world.(resources & population) After the war the U.S.A. became wealthy by mass producing consumer goods like radio’s and cars. Factory workers were paid well which meant they spent money on consumer goods.

THE WALL STREET CRASH As the 20’s progressed, more and more people were buying shares of companies “on margin” and these shares rose in price. By 1929 share prices were rising but profits for companies began to decline. In October of 1929 panic selling of shares forced the value of shares to drop drastically.(crashed) The stock market crash brought an end to prosperity in the U.S.A..

Other Causes of The Great Depression Demand for goods could not keep up with supply Droughts Wages did not increase Farmers went bankrupt Banks failed Factories closed Increase in unemployment High rate of corporate fraud

THE “GREAT”DEPRESSION By 1931, unemployed people were lining up in breadlines since there was no unemployment insurance. By 1932, 12 million people were unemployed. In 1932, the American people voted for Franklin D. Roosevelt as president on a platform of government intervention to get the USA out of the Depression.

THE “NEW DEAL” Franklin D. Roosevelt’s program of government spending to help the people of the United States against the Depression. He wanted to “prime the pump”. He believed that putting money into people’s pockets was like pouring gas into an engine to get it started.

ALPHABET AGENCIES CCC(Civilian Conservation Corps) –Cut fire lanes through forests. –Planted trees –Worked in camps received food and shelter. ($1/day) WPA(Works Progress Adm.) –Built schools, buildings & roads PWA(Public Woks Adm.) –Built dams & bridges TVA(Tennessee Valley Auth.) –Aims were to stop floods, make electricity and create fertile land.

TRADE UNIONS Wagner Act(1935) In 1935 Roosevelt passed a law which gave workers the right to form unions.

SOCIAL SECURITY Social Security Act (1935) Gave government pensions to those who could not provide for themselves. Unemployment insurance was introduced. Taxed workers to provide money for social security.

LABOUR LAWS FAIR LABOUR STANDARDS ACT (1938) Set out the maximum hours of work and minimum wage laws.

Effect of WWII Job creation for war goods (Lend Lease Act) Increase in American GNP

Demand Side Economics (Keynesian) John Maynard Keynes (Keynesian Theory) Capitalism tends to move through cycles –Prosperity –Recession –Depression –Recovery It is therefore necessary for governments to regulate the economy by spending money temporarily “priming the pump” during recession or depression.

depression prosperity FISCAL POLICY Increase government $ Decrease taxes MONETARY POLICY Increase $ supply Decrease interest rates FISCAL POLICY Decrease government $ Increase taxes MONETARY POLICY Decrease $ supply Increase interest rates Deficit financing

Supply Side Economic (Reaganomics) Supply-siders dislike government involvement in the economy and emphasize greater reliance on private enterprise.

In Times Of Recession… Reduce corporate taxes –Creates more profit –Acts as incentive to enter business Reduce public income tax –Increases public’s incentive to work –Provides more money to spend –Increased production creates demand Supply-siders insist that increased demand for goods and services must come from the private sector, not from government spending.

In Times of Inflation… The unrestricted market will eventually bring inflation under control

Reaganomics in Action Reaganomics Following 1981 the Reagan administration put in action the following policies… Tax cuts primarily for corporations and the wealthy Cut income tax 25% Government spending cuts in social services Welfare subsidies, Medicaid, food stamps A stable money supply Deregulation of the economy Reduced environmental, health, & safety regulations An aim to balance the budget.

Thatcherism in Action Thatcherism Following 1979 the Thatcher government in Britain put in action the following policies… –Wide scale privatization –Emphasis on individual initiative –Reduced the power of labor unions –Reduced income and corporate taxes

Reaganomics: A Balance Sheet Arguments in Favor A reduction in unemployment A reduction in inflation An increase in production A world wide move towards private enterprise Arguments Against Growing national debt Growing inequalities in income levels A boom and bust cycle The decline of the middle class.