1. Back of the Classroom People who are famous should get paid more
Computer Pod Door
Pay People for How Much Work They Get Complete
Classroom Door W a l o f P s t e r
Back of the Classroom W I N D O S
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
Front of the Classroom (Smartboard)
Mr. Lejano’s
Desk
Pay People Based on Effort

2. Economic Theories & Systems
Feb 18th, 2014

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

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

5. Adam Smith & the Market Economy

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

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

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

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

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

11. Consumers
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
If unwilling, G & S will not stay in business and consumers will not get what they want

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

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

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

15. Strengths
Inspires ingenuity
Hard work
Productivity
Efficiency

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

17. Remember The Free Market Answers the 3 Basic Economic Questions
Market Economies
Remember
The Free Market Answers the 3 Basic Economic Questions

18. Command Economies

19. Statistics to think About:
Richest 1% own 33% of this country’s wealth
95-98th Percentile own 25%
90-94th own 12.1%
49th – 89th own 27%
Poorest 50% own 2.8%

21. Karl Marx
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

22. A Command Economy Values These Ideas
Equality
Cooperation
Collectivization

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

24. Goals: Equality Cont’d
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

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

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

27. Characteristics of Command Economies

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

29. Central Planning
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.

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

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

32. 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.)

33. Weaknesses: Lack of Incentive
People have less incentive to
work hard
be educated or
invent better products
Efficiency and production suffer

34. Weaknesses: 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

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