3. Objectives A. Traditional – “Custom rules” B. Command – “Government rules” C. Market – “Individuals rule” D. Mixed 1.) Capitalism 1.) Capitalism 2.) Communism 2.) Communism 3.) Democratic Socialism 3.) Democratic Socialism

4. Why do we have Economic Systems?   Survival for any society depends on its ability to provide food, clothing, and shelter for its people.   The Economic System is the organized way a society provides for the wants and needs of its people.

5. FREEDOM OF ENTERPRISE & CHOICE PRIVATEPROPERTY ROLE OF SELF-INTEREST COMPETITION

6. MARKETS & PRICES FREEDOM OF ENTERPRISE & CHOICE ACTIVE, BUT LIMITED,GOVERNMENT ROLE OF SELF-INTEREST COMPETITION PRIVATEPROPERTY

7. Freedom of Enterprise (business) & Choice 2. Freedom of Enterprise (business) & Choice Can move within the economy to any job, to buy or sell property, or start a business. consumer is “sovereign”king The consumer is “sovereign” (king) in the economy. His dollars vote as it is he who decides what gets produced. 100,000 business failures The U.S. has over 100,000 business failures each year. Private Property 1. Private Property – the right of individuals to exercise control over things owned. Freedom to negotiate binding legal contracts. legally bindingoral or written Contracts are legally binding in oral or written form. [A verbal agreement is binding only if it involves a small sum of money over a short period of time and does not involve real estate purchases.] Role of Self-Interest 3. Role of Self-Interest – each producer or consumer best for themselves tries to do what is best for themselves. Self interest is the main force driving the economy. Producersmaximum profits Producers aim for maximum profits. Consumerslowest prices & highest quality Consumers seek the lowest prices & highest quality. K-Mart?

8. And – an appendage to be named later, like a - “Competition” “Competition” and “self-interest” “self-interest” are like “invisible hand”. an “invisible hand”. Monopolies can charge an arm and a leg. “invisible hand” So, the “invisible hand” refers to the way a market economy manages to harness the power of self-interest for the good of society. A monopoly’s attitude is: “W e d on’t care. We don’t have to. We’re a monopoly!” Competition 4. Competition – economic rivalry of a large number of buyers & sellers. [central mechanism of market economy] Monopolies become fat & unresponsive Monopolies become fat & unresponsive to consumers higher prices & fewer choices (higher prices & fewer choices). Competition prevents one seller from controlling the market. Monopolies are “price makers” “price takers” “price makers”. It is better to have “price takers” “mercy of the market.” who are at the “mercy of the market.”

9. Markets & prices 5. Markets & prices. Markets bring the buyers and sellers into contact. High pricesincrease Prices send signals. High prices send signals to increase production enter the market production and for other producers to enter the market. Low pricesdecrease production Low prices send signals to decrease production exit the market and for producers to exit the market. Limited Government Intervention 6. Limited Government Intervention in the economy. “laissez faire.”“hands off” The role of government was one of “laissez faire.” [“hands off”] government should not interfere with In the words of Adam Smith, the government should not interfere with the operation of the economy except serve as an arbitrator in settling disputes disputes. government’s role The government’s role: (according to Smith) a. provide defense, b. administer justice, and c. maintain certain public institutions. 1/3 of economic activity The government controls about 1/3 of economic activity. Arbitrator [settling disputes] We have “Market Inventors” like AL GORE!!!

10. Protector –The government makes and enforces laws against: False advertising, unclean food and medicine, pollution and unsafe products –Enforces laws against discrimination in the work place. –The government enforces contracts. Provider and Consumer –Provides products & services that businesses don’t provide, like: schools, roads, an army, and welfare. –The government is also a consumer because it buys things from businesses, like: fighter jets, aircraft carriers, submarines and tanks. Regulator –The government regulates or makes rules for businesses to follow. For example, the government decides which frequency radio stations can broadcast on. The government also makes rules for running nuclear power plants & so on…

11. 1. Reliance on Technology and Capital Goods and Capital Goods RoundaboutProduction Assembly line [roundabout production] results in more efficient production and more output. Farmers are more efficient using capital goods [plows & tractors] instead of their hands.

12. 1. Reliance on Technology and Capital Goods and Capital Goods 2. S pecialization and E fficiency  Makes Use of Differences in Ability  Fosters Learning by Doing  Saves Time & a fast person can be a hunter] [ A slow person can fish

13. [when bilateral trade is not beneficial] Texas Rangers Three-wayExchange

14. Crusoe would get coconuts 52. Crusoe would get coconuts from (Friday/Saturday). coincidence of wants 53. There (is/is no) coincidence of wants between any 2 states. Money would flow 54. Money would flow (clockwise/counterclockwise). “coincidence of wants” 55. The “coincidence of wants” problem means each transactor (must/must not) have a product which the other wants. S aturday Has surplus bananas Wants fish Wants fish Friday Has surplus coconuts Wants bananas C rusoe C rusoe Has surplus fish Wants coconuts

15. 1. Reliance on Technology and Capital Goods and Capital Goods 2. Specialization and Efficiency  Division of Labor

16. 1.Reliance on Technology and Capital Goods and Capital Goods 2. Specialization and Efficiency  Geographic Specialization TexasFloridaNebraska

17. 3. Use of Money 1. Reliance on Technology and Capital Goods and Capital Goods 2. Specialization and Efficiency  As a Medium of Exchange

18. 3. Use of Money 1.Reliance on Technology and Capital Goods and Capital Goods 2. Specialization and Efficiency  Money Eliminates Barter System Difficulties

19. GLOBAL PERSPECTIVE Index of Economic Freedom, Selected Nations Hong Kong New Zealand United States Belgium Spain France Russia Brazil China Cuba Venezuela North Korea FREE MOSTLY FREE MOSTLY UNFREE REPRESSED Source: Heritage Foundation & The Wall Street Journal

20. NS 50-51 unique to capitalist ideology 50. The following is unique to capitalist ideology: (use of money/ specialization/private ownership of property). “Roundabout production ”assembly line 51. “Roundabout production ” [assembly line] leads to: (use of fewer capital goods/greater production).

21. Three Basic Questions... The Three Basic Questions... Whathowfor whom What, how, & for whom 1. What will be produced?

22. The Three Basic Questions... 2. How will the goods be produced? 1. What will be produced?

23. The Three Basic Questions... 2. How will the goods be produced? 1. What will be produced? 3. Who will get the goods & services?

24. The Case for the Market System Efficiency, Incentives, and Freedom “invisible hand” Adam Smith said the “invisible hand” determines what gets produced, how, & for whom. It is the invisible hand that moves us along the PPC. The invisible hand is now market mechanism called the market mechanism. Its essential feature is price signal the price signal. Smith is saying that participants in the economy are motivated by self-interest “invisible hand” self-interest & that the “invisible hand” of the marketplace guides promoting general economic well-being this self-interest into promoting general economic well-being.

25. Most needy or most money LimitedResources UnlimitedWants Choices WHAT G/S to produce? WHO will receive the G/S produced? [Eskimo/pygmy] Answers to the above determine: ECONOMIC SYSTEMS 3 BASIC ECONOMICQUESTIONS TRADITIONAL FREE MARKET COMMAND HOW will the G/S be produced?

26. A. Traditional – “Custom rules” B. Command – “Government rules” C. Market – “Individuals rule” D. Mixed 1.) Capitalism – modified free enterprise 1.) Capitalism – modified free enterprise 2.) Communism 2.) Communism 3.) Democratic Socialism 3.) Democratic Socialism

27. 1.Traditional 2.Pure Command 3.Pure Market 4.Mixed a. Capitalism b. Democratic Socialism c. Authoritarian Socialism [Communism] The way the 3 basic questions are answered Determines an economic system. 1.Traditional -[where “CUSTOM RULES”] A. What, how, and for whom are answered by tradition B. Change is resisted, no technology [clashes with tradition] C. Heredity and caste system limit the economic role of individuals. D. 35,000 Pygmies in the Ituri Forest are an example. E. Men hunt & women/children gather/prepare food. F. Wear loincloths from bark of fig trees [“PYGLER” or “PYBUGLE Boy”] G. Eat mushrooms, berries, roasted grasshoppers, monkeys, & plantain H. Eat bone marrow & everything else in an elephant. “ PYGACHE ”, “ LARDACHE.” I. Used to be “ PYGACHE ”, big Pygmies, have to wear “ LARDACHE.” the way society produces products – the way society produces products

28. Economic activity is based on ritual, habit and custom. Strengths Everyone knows their role. Little uncertainty over what to produce or how to produce. The question of For Whom to produce is answered by custom. Life is generally stable, predictable, and continuous. Weaknesses Tends to discourage new ideas. Lack of progress leads to lower standard of living.

29. Government “rules”. Economic decisions are made at the top and the people are expected to go along with choices their leaders make. Strengths Change direction drastically in a relatively short time (The USSR went from an agrarian to industrial nation in a very short time). Weaknesses Not designed to meet the wants and needs of individuals. Lack of incentives to work hard leads to unexpected results. Large bureaucracy for economic planning. Not flexible in dealing with minor day to day problems. People with new or unique ideas are stifled. Fidel Castro Karl Marx

30. mixed economy both market signals and government directivesA mixed economy is one that uses both market signals and government directives to allocate goods & resources. combination market signals and governmentMost economies use a combination of market signals and government directives to select economic outcomes.

31. People and firms act in their own best interest to answer economic questions. Markets allow buyers and sellers to come together in order to exchange goods and services. Markets can adjust over time. Freedom exists for everyone involved. Relatively small degree of governmental influence. Decision making is decentralized. Variety of goods and services are produced. High degree of consumer satisfaction. Strengths Adam Smith “Invisible” hand

32. Weaknesses The primary weakness is deciding for whom to produce. The young, sick and old would have difficulty in a pure market environment. Markets sometimes fail. –Competition (monopolies may develop) –Resource mobility (resources are sometimes hindered from moving about) –Availability of information (producers often have more information than do consumers, which gives them an advantage)

33. You are free to: –Choose your job –Choose where and when you work –Work for yourself or someone else –Leave your job and to move to another job Businesses are free to: –Choose which workers they want –Figure out how much business they want to do

34. Householders Businesses The Circular Flow is an abstract, oversimplified model, showing how economic transactions [resources, products (g/s), and money] take place. Products[goods/services] R esources [Land, labor, cap., ent.] a. Goods and services b. Consumer expenditures c. Land, labor, cap., entrepreneur d. Rent, wages, interest, & profits 1 2 3 4 1 2 4 3

35. Householders Businesses Products[goods/services] R esources [Land, labor, cap., ent.] a. Goods and services b. Consumer expenditures c. Land, labor, cap., entrepreneur d. Rent, wages, interest, & profits 1 2 3 4 3 4 2 1 D S Product Market Resource Market D S

36. BUSINESSES HOUSEHOLDS PRODUCT MARKET Mechanic RESOURCE MARKET 1 2 3 4 4 3 A.P roducts [Goods/services] B.C onsumer expenditures C.L and, Labor, Capital, Entrepreneur D.R ent, Wages, Interest Profits

37. BUSINESSES HOUSEHOLDS PRODUCT MARKET Mechanic RESOURCE MARKET 1 2 3 4 A.P roducts [Goods/services] B.C onsumer expenditures C.L and, Labor, Capital, Entrepreneur D.R ent, Wages, Interest Profits 4 3 1 2

38. BUSINESSES HOUSEHOLDS RESOURCE MARKET RESOURCESINPUTS $ COSTS $ INCOMES PRODUCT MARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE

39. BUSINESSES HOUSEHOLDS RESOURCESINPUTS $ COSTS$ INCOMES PRODUCTMARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT RESOURCE MARKET NET TAXES FLOW TO GOVERNMENT FROM BUSINESSES GOVERNMENT GOODS & SERVICES FLOW TO BUSINESSES Taxes G/S

40. BUSINESSES HOUSEHOLDS RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT RESOURCE MARKET NET TAXES FLOW TO GOVERNMENT FROM HOUSEHOLDS GOODS & SERVICES FLOW TO HOUSEHOLDS FROM GOVERNMENT Taxes G/S National Defense

41. BUSINESSES HOUSEHOLDS RESOURCESINPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION$ REVENUE G OVERNMENT EXPENDITURES FLOW TO ACQUIRE RESOURCES RESOURCE MARKET RESOURCES FLOW TO GOVERNMENT L,L,C,E

42. BUSINESSES HOUSEHOLDS RESOURCESINPUTS $ COSTS$ INCOMES PRODUCTMARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION$ REVENUE GOVERNMENT RESOURCE MARKET GOVERNMENT EXPENDITURES FLOW TO PRODUCT MARKET GOODS & SERVICES FLOW TO GOVERNMENT B - 2 Bombers

43. NS 56-59 product market 56. In the product market (householders/businesses) are the demanderssuppliers demanders and (householders/businesses) are the suppliers. resource market 57. In the resource market (householders/businesses) are the demanders suppliers demanders and (householders/businesses) are the suppliers. resource market 58. In the resource market, (householders/businesses) sell resources sell resources to (householders/businesses). product marketsell 59. In the product market, (householders/businesses) sell products products [goods/services] to (householders/businesses). Fuzzy Wuzzy