What is an Economy?

Economics is the study of how individuals and governments use scarce resources to produce and buy the goods they want/need. Scarcity – the problem of limited resources An economy is a system that deals with scarcity.

Each economy deals with scarcity in its own way. Every economy must answer the 3 basic economic questions. (1)What goods are produced? (2) How should goods be produced? (3) For whom should goods be produced? (and how much?)

In order to produce goods, you need to have a supply of the means of production: land, labor & capital. LAND: natural resources that come from the Earth (land). Examples: oil, soil, minerals, water, air, fish, deer LABOR: the efforts of people to make the goods. You need a labor force that is trained for its job. CAPITAL: the money or other assets needed to produce goods. Factories, equipment, machines, transportation, power stations, communication services are all capital.

The 3 Economic Systems

Every economy answers the 3 questions differently, but there are 3 basic types of economies: (1) Market economy – also known as free market, or capitalism (2) Command economy – also known as centrally planned economy. (3) Mixed economy

Market Economy a market exists when people wanting to buy goods/services meet freely with others who want to sell goods/services. in a market economy, the government DOES NOT get involved and the 3 economic questions are answered by private individuals. U.S.A. = best example of Market economy

CONSUMERS sell services (labor) to producers for money (wages). CONSUMERS demand certain goods. PRODUCERS sell goods to consumers for money. PRODUCERS supply the goods consumers want/demand.

Command Economy In a command economy the government makes most or all of the economic decisions. The gov’t owns/controls the means of production and answers the 3 economic questions. Karl Marx – first came up with ideas for the command economy, thought that workers would overthrow capitalism because they were being exploited. Soviet Union = best example of Command economy

Mixed Economy A mixed economy has economic freedom for individuals but the government also has some control over the economy. Example: Canada seems like it has a market economy, but the gov’t owns some companies and controls some resources. Gov’t also funds things like health care.

The Economic Spectrum We can organize the 3 economic systems on a spectrum based on the level of government involvement. In reality, no system is a pure command or market economy.

The Market Economy & the U.S.

The Basics All economies must deal with the problem of scarcity. Market economies answer this problem by allowing private individuals the freedom to control the means of production and make decisions out of their own self-interest. In theory, if everyone does what’s best for themselves this will benefit the entire society/country. Producers make decisions based on profit motive – trying to make the most money they can. The law of supply and demand controls economic decisions in a free market. Equilibrium price – the price that producers are willing to sell at, and consumers are willing to buy at  arrived at through the law of suppy & demand.

CONSUMERS sell services (labor) to producers for money (wages). CONSUMERS demand certain goods. PRODUCERS sell goods to consumer for money. PRODUCERS supply the goods consumers want/demand.

Key Features Consumer sovereignty – people have the freedom to buy/not buy whatever they want Producers will use advertising to try and influence consumer decisions. Competition between different producers is important because it results in lower prices and higher quality goods.

Private ownership – the means of production are owned by individuals not the gov’t. Consumer rights & responsibilities – the gov’t will protect consumer rights to have choice and be safe, the gov’t will prevent monopolies and unsafe practices. In return, consumers have the responsibility to obey laws and follow directions.

Pros & Cons Advantages: - lots of freedom/choice, encourages individual responsibility and self-reliance, encourages efficiency and innovation Disadvantages: - lack of direction/control  boom/bust cycle & instability, unsafe products, large gap between rich/poor, lack of social programs (health care, unemployment, etc.)

More on the American Market Economy

Labour Unions Labour union – an organized group of workers with the goal of protecting worker rights (securing fair wages, benefits, job security, etc.) The goals of workers and unions often come into conflict with the goals of their employers (producers). Treating workers well is often expensive. Unions will pressure gov’t to make laws that benefit workers.

Unions also engage in collective bargaining with employers. This is where they negotiate contracts for all workers in a certain business that guarantee wages, working conditions, etc. for a period of time. –Ex: The lockout during the NHL season in was because the NHLPA (union of players) and the NHL (the employer) could not agree on a new collective bargaining agreement.

Corporations Corporation – a group of people who all own a company together as a group. In the USA, corporations have the same rights as people (can buy/sell property, borrow money, be sued by people, etc.) Limited liability – because corporations are owned by a large number of people (stockholders) each individual is liable (responsible) for only the % of the corporation that they own. People who own more shares in a corporation can make more profit, but take the risk of losing more money.

Role of Gov’t in USA In theory, the gov’t NEVER gets involved in a market economy. No country (including the US) is a pure market economy, so the American gov’t does get involved in small ways. Anti-Trust Laws – prevent monopolies, protect consumers’ right to choice

During the Great Depression (1930s) between 20-40% of Americans were unemployed. All citizens (even those with jobs) struggled to make enough money just to survive. Because gov’t stayed out of the economy, there was no where for the people to turn for help. UNTIL…

“The New Deal” – President Franklin D. Roosevelt started a plan that involved the gov’t spending money to help people out by creating jobs and gov’t agencies to help those in need. The New Deal helped people survive through the Depression.

Today, the U.S. gov’t still tries to stay out of the economy as much as possible. Gov’t involvement in the U.S. is limited mostly to protecting consumer rights and regulating the business cycle. Some social programs (ex: unemployment insurance) still exist too. The U.S. also has progressive income tax. This means people who make more money pay more taxes.

Canada’s Mixed Economy

Remember the economic spectrum:  ---Centrally Planned Mixed Market-----  Mixed economies fall in the middle of the economic spectrum because they have economic freedom for individuals but there is also gov’t ownership and involvement in the economy. In Canada, the 3 economic questions are answered by both gov’t and private individuals.

Gov’t will buy companies or bail out industries that are in trouble in order to protect jobs. Ex: payments given to farmers during the mad cow crisis. Gov’t will own companies in industries that are too risky/expensive for private individuals to get involved in. Ex: building the railroad across Canada. Gov’t owned organizations are known as crown corporations. Ex: CBC Most of Canada’s gov’t involvement is to provide services and protect equality. Examples: health care, education, employment insurance.

Economic decisions in Canada are made by both the private and public sectors. Private sector includes individual citizens, households, small businesses, and large multinational corporations. Public sector = gov’t. Downside to mixed economies  HIGH TAXES  needed to pay for gov’t services. The most important belief/value in the mixed economy is equality. All people should have a chance to succeed in life and have their basic needs met. Opportunity cost – the sacrifice of one choice to get another. (Example: I decide to buy a Wii, and as a result I can’t afford to buy an Xbox 360)