1. Answering the Three Economic Questions The Free Market Centrally Planned and Modern Economies

2. The Three Economic Questions
Every society must answer three questions:
What goods and services should be produced?
How should these goods and services be produced?
Who consumes these goods and services?

3. Economic Goals
Societies answer the three economic questions based on their values:
Economic Efficiency= (Making the most of resources)
Economic Freedom= (Free from government intervention)
Economic Security and Predictability= (Availability, payment, and safety nets)
Economic Equality= (Fair distribution of wealth)
Economic Growth and Innovation= (Leads to a higher standard of living)

4. Identify the opportunity costs of hand tool farming?
Hand Tools + + =
1 acre of land
56 worker-hours
capital
15 bushels of wheat
Identify the opportunity costs of hand tool farming?

5. Modern Mechanical Equipment+ + =
1 acre of land
2.9 worker-hours
capital
40 bushels of wheat
Identify the opportunity costs of modern mechanical equipment farming?

6. Which economic goal could help them recover from a storm?
Economic Efficiency
Economic Freedom
Economic Equality and Predictability
Economic Equity
Economic Growth and Innovation
Other goals

7. Four Economic Systems
An economic system is the method used by a society to produce and distribute goods and services.
Traditional Economies
Centrally Planned Economy
Market Economy
Mixed Economies

8. Traditional Economies
They rely on habit, custom, or ritual to decide what to produce, how to produce it, and to whom to distribute it.

9. Traditional Economies
Existed in earlier ages and in some industrialized nations today
Goods are produced and distributed in the same ways that have been used for centuries
Caste System in India

10. Centrally Planned Economy
The central government makes all decisions about the production and consumption of goods and services.
The Former Soviet Union

11. Market Economy
Economic decisions are made by individuals and are based on exchange, or trade.

12. Mixed Economies
Are systems that combine tradition and the free market with limited government intervention.

13. What is a Market?
A market is an arrangement that allows buyers and sellers to exchange goods and services.
Specialization is the concentration of the productive efforts of individuals and firms on a limited number of activities.

14. Cook and Wait in Customers Cook and Wait on Customers
Anne the Cook
Cook Full Time
Cook and Wait in Customers
Meals Cooked per Day 20 4
Customers Waited on per Day
Sam the Waiter
Wait Full Time
Cook and Wait on Customers
According to the table, if Anne and Sam each worked together, how many meals per day would be served by each of them? 2 20 5 4

15. Production Possibilities for Two Countries

16. Production Possibilities for Two Countries
Will these two countries gain from trade if 100 units of malaria medicine are traded for 200 cotton shirts?
To find out:
1. Calculate the opportunity costs of production for each country
2. Determine the comparative advantage for each country
3. Determine if the terms of trade are mutually beneficial

17. Production Possibilities for Two Countries
Bangladesh
United States
Cotton Shirts (C)
750C = 250M
1C = 1/3M
1000C =1000M
1C = 1M
Malaria Medicine (M)
250M = 750C
1M = 3C
1000M =1000C
1M = 1C

18. Why Do Markets Exist?
Markets exist because none of us produces all the goods and services we require to satisfy our needs and wants.

19. The Free Market Economy
Households and business firms use markets to exchange money and products.
Households own the factors of production (land, Labor, and capital)
Households also consume the goods and services.

20. Product market Factor market
monetary flow
physical flow
Circular Flow Diagram of a Market Economy
Households
Firms
Product market
Households pay firms for goods and services.
Firms supply households with goods and services.
Households supply firms with land, labor, and capital.
Firms pay households for land, labor, and capital.
Factor market

21. What is the exchange in the factor market? In the product market?
monetary flow
physical flow
Circular Flow Diagram of a Market Economy
Households
Firms
Households pay firms for goods and services.
Product market
Firms supply households with goods and services.
Households supply firms with land, labor, and capital.
Firms pay households for land, labor, and capital.
Factor market

22. How does the Free Market Work?
In every transaction, the buyer and seller consider only their self-interest, or their own personal gain.
Self-interest is the motivating force in the free market.

23. Self-Interest Creates Competition
Producers in a free market struggle for the dollars of consumers.
This is known as competition, and is the regulating force of the free market.

24. Competition Creates the Invisible Hand
The interaction of buyers and sellers, motivated by self-interest and regulated by competition, all happens without a central plan.
This phenomenon is called “the invisible hand of the marketplace.”

25. What Makes the Free Market Great?
The Free Market gives buyers and seller to interact with little or no government interaction
This happens through:
Economic Efficiency= (Self regulation)
Economic Growth= (Competition encourages growth)
Economic Freedom= (Do as you please)

26. What is a Centrally Planned Economy?
In a centrally planned economy:
The government owns both land and capital.
The government decides the three economic questions:
What to produce
How much to produce
But, How much to charge (This one is different)
Centrally Planned Economies are classified as Socialist and Communist

27. How would you describe production in this Chinese factory?

28. Socialism
Socialism is a social and political philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout a society.
Real equality can only be achieved when political equality is combined with economic equality.
Economic equality only happens when the public controls the centers for economic power.

29. Real equality can only be achieved when political equality is combined with economic equality.
Economic equality only happens when the public controls the centers for economic power.
These nations may claim to be democratic but need a high degree of centrally planning to work.

30. Communism
Communism is a political system characterized by a centrally planned economy with all economic and political power resting in the hands of the government.

31. In theory Communism works
After a violent revolution to create a communist state:
Ruled by a single leader
Try to build a national power by using the best of the factors of production
Communism promises equality for everyone

32. The Former Soviet Union
The former Soviet Union used three factors to create a national powerhouse:
Agriculture
Industry
Consumers

33. Soviet Agriculture In the Soviet Union:
The government created large state-owned farms and collectives for most of the country’s agricultural production.

34. How would you describe the farming techniques in this photo of a Soviet Collective?

35. Soviet Industry
Soviet planners favored heavy-industry production (such as steel and machinery), over the production of consumer goods.

36. Soviet Consumers
Consumer goods in the Soviet Union were scarce and usually of poor quality.

37. Problems of a Centrally Planned Economy
Centrally planned economies face problems of poor-quality goods, shortages, and diminishing production.
A lack of competition due do equality causes this

38. The Problem with Market Economies
Laissez faire is the doctrine that government generally should not interfere in the marketplace.
The economy runs itself
Market economies, with all their advantages, have certain drawbacks.
They will need help to keep stability

39. The Mixed Economy
How do government actions affect the circular flow model in a mixed economy?

40. The Mixed Economy In a mixed economy:
The government purchases land, labor, and capital from households in the factor market
Purchases goods and services in the product market.

41. Comparing Mixed Economies
Economic systems are classified by the amount of government involvement.
Centrally Planned has lots of government intervention
Free Market (Free Enterprise) has very little if any government
The degree of government involvement in the economy varies among nations.

42. Label by Economy
Cuba
United States
Canada
China
Hong Kong
France