Back of the Classroom Front of the Classroom (Smartboard) Computer Pod Door Classroom Door WINDOWSWINDOWS WallofPostersWallofPosters Mr. Lejano ’ s Desk Pay People for How Much Work They Get Complete Pay People Based on Effort Everyone Should Get Paid The Same People who are famous should get paid more 4 Sides Stand in front of the wall that you think is best

Economic Theories & Systems Feb 18 th, 2014

3 Basic Questions an Economic System Must Answer WHAT to produce WHAT to produce HOW to produce HOW to produce FOR WHOM to produce FOR WHOM to produce

Allocation Determine what needs or wants should be addressed & Determine what needs or wants should be addressed & Determining what (& quantity) factors of production will go towards addressing them Determining what (& quantity) factors of production will go towards addressing them

Adam Smith & the Market Economy

Adam Smith Economist who believed the 3 Basic Economic questions would be answered by… Economist who believed the 3 Basic Economic questions would be answered by… The MARKET (interaction between producers & consumers) itself The MARKET (interaction between producers & consumers) itself The “ Invisible Hand ” – The MARKET will correct itself The “ Invisible Hand ” – The MARKET will correct itself

Market Economy/Capitalism: Key Components Free Competition Free Competition Profit Incentive Profit Incentive

How? Self - Interest Producers Self – Interest: Producers Self – Interest: MAXIMIZE PROFIT MAXIMIZE PROFIT Profit = (Quantity Sold X Price) - Cost Profit = (Quantity Sold X Price) - Cost

How can producers maximize their profits? A)Produce products or services that consumers want A)Produce products or services that consumers want B)Produce them efficiently (ie. Quickly and cheaply) B)Produce them efficiently (ie. Quickly and cheaply) C)Sell them at prices that consumers are willing to pay C)Sell them at prices that consumers are willing to pay

What if they don ’ t? Competition & time will eliminate the business from the market Competition & time will eliminate the business from the market

Consumers Self – Interest: Acquire desirable GOODS & SERVICES for as low a price as possible Self – Interest: Acquire desirable GOODS & SERVICES for as low a price as possible Responsibility: Must be willing to pay a REASONABLE price for G & S they want Responsibility: Must be willing to pay a REASONABLE price for G & S they want If unwilling, G & S will not stay in business and consumers will not get what they want If unwilling, G & S will not stay in business and consumers will not get what they want

Invisible Hand - Market Mechanism Competition & self- interest will automatically lead to prices and output that best serve society Competition & self- interest will automatically lead to prices and output that best serve society

Laissez Faire (French: “ do not interfere/hands off ” ) (French: “ do not interfere/hands off ” ) doctrine that an economic system functions best when there is no interference by gov’t doctrine that an economic system functions best when there is no interference by gov’t

Followers of Laisez Faire believe the MARKET can allocate resources & correct itself much better & faster than the gov’t could Followers of Laisez Faire believe the MARKET can allocate resources & correct itself much better & faster than the gov’t could

Strengths & Weaknesses of Market Economies

Strengths Inspires ingenuity Inspires ingenuity Hard work Hard work Productivity Productivity Efficiency Efficiency

Weaknesses Often leads to the exploitation of workers/poor Often leads to the exploitation of workers/poor Unemployment Unemployment Failed businesses Failed businesses Severe disparity between the rich & the poor Severe disparity between the rich & the poor Ethical & Environmental Violations Ethical & Environmental Violations

Market Economies Remember Remember –The Free Market Answers the 3 Basic Economic Questions

Command Economies

Statistics to think About: Richest 1% own 33% of this country ’ s wealth Richest 1% own 33% of this country ’ s wealth th Percentile own 25% th Percentile own 25% th own 12.1% th own 12.1% 49 th – 89 th own 27% 49 th – 89 th own 27% Poorest 50% own 2.8% Poorest 50% own 2.8%

Karl Marx Disproportionate distribution of wealth inherent in a capitalist economy Disproportionate distribution of wealth inherent in a capitalist economy Working class (proletariat) violently revolting against the ruling class (bourgeoisie) State takes over Factors of Production and redistributes them to the people – Classless equitable society

A Command Economy Values These Ideas Equality Equality Cooperation Cooperation Collectivization Collectivization

Value: Equality Emphasized b/c of the problems with market economies: Emphasized b/c of the problems with market economies: –workers suffer –Wealth is distributed disproportionately

Equality Cont ’ d Goals: Goals: all members should have the SAME opportunity to share in the wealth of a country. all members should have the SAME opportunity to share in the wealth of a country. There needs to be a “ minimum ” standard of living that everyone should enjoy There needs to be a “ minimum ” standard of living that everyone should enjoy

Value: Cooperation All work toward a common goal All work toward a common goal do what is in the best interest of the whole society (Social Choice), not the individual do what is in the best interest of the whole society (Social Choice), not the individual

Value: Collectivization Collecting everyone ’ s talents together in a cooperative effort can accomplish more Collecting everyone ’ s talents together in a cooperative effort can accomplish more

Characteristics of Command Economies

Public Ownership of Property State/Government controls/owns the resources b/c they believe they can maximize the use of the resources State/Government controls/owns the resources b/c they believe they can maximize the use of the resources

Central Planning A group of economic “ experts ” study the economy & recommend production needs & targets to the governing body. A group of economic “ experts ” study the economy & recommend production needs & targets to the governing body. Production & supposedly consumption are planned far into the future. Production & supposedly consumption are planned far into the future.

Strengths Less disparity in distributed wealth (recall statistics) Less disparity in distributed wealth (recall statistics) Higher levels of employment Minimum standard of living for all

Weaknesses: Shortages & Surpluses It is difficult for the central planning committee to set production targets that exactly fit the country ’ s needs It is difficult for the central planning committee to set production targets that exactly fit the country ’ s needs

Weaknesses: Slow Response to Scarcity and Consumer Needs Production Targets are less flexible to adapt to unforeseen circumstances (product is more popular than anticipated, natural disasters, etc.) Production Targets are less flexible to adapt to unforeseen circumstances (product is more popular than anticipated, natural disasters, etc.)

Weaknesses: Lack of Incentive People have less incentive to People have less incentive to work hard work hard be educated or be educated or invent better products invent better products Efficiency and thus, production suffers

Weaknesses: Corruption Central Gov ’ t & central planning committee have an enormous amount of power and is susceptible to corruption Central Gov ’ t & central planning committee have an enormous amount of power and is susceptible to corruption Shortages encourage items to be illegally imported and sold on the black-market

Command Economies Remember: Remember: –“The State has command over the 3 basic economic questions.”