1. Economic Systems
Chap 2.1

2. Political Systems
Over the course of time different systems have evolved to deal with the issue of scarcity
The system a country adopts depends on the goals of the country
Every society has to answer these questions: a) What goods and services will be produced? b) How will they be produced? c) Who consumes the goods and services?
These questions create dilemmas defense or education welfare or consumer goods guns and butter

3. Goals of Society
Economic Efficiency – most societies try to maximize the return on their resources
Economic Freedom – different economic systems allow different degrees of economic freedom
Economic Security and Predictability – people want to know that their government will work for them and protect them – safety net
Economic Equity – who gets what? Do the unemployed deserve the same as the employed. Should teachers be paid more or less?

4. Economic Growth and Innovation – only when the economy grows will the standard of living improve. Innovations improve efficiency. Think internet
Other possible goals – the environment, full employment, healthcare

5. Economic Systems
1. Traditional Economies – relies on customs, habits, and traditions. a) little change or innovation b) work usually along gender lines c) usually small, close-knit communities d) usually hunter-gatherer societies e) generally a low standard of living f) examples include: almost every African country, Burma, Bangladesh

6. 2. Command Economies – only the central government decides economic decisions a) also called command economies b) main goal is to look after the people c) no competition d) examples include: Cuba, China, North Korea

7. 3. Mixed Economies – market-based system with government playing a limited role a) most modern economies are mixed b) government controls fiscal and monetary policies c) the accumulation of capital is the main goal d) examples include: Italy, France, Spain

8. 4. Market Economies – economic decisions are made by individuals, based on exchange a) laissez-faire - advocated by Adam Smith b) also called capitalism or free market c) is very competitive d) examples include: United States, Canada, Great Britain

9. Examining Issues
In America, economics controls politics Republicans – individuals should take care of themselves with very limited help from the government Democrats – the government should take care of the society (socialism)
The bailouts – at least $8.5 TRILLION and growing

10. The Free market
Chap 2.2

11. The Free Market Markets are everywhere
A market is a place where buyers and sellers meet ie. Farmer’s market, stockmarket, Starbucks
They exist because we need to trade – we exchange what we have for what we want
Most people specialize in one skill or trade
Specialization is the most efficient use of resources
Wages (money) is a medium of exchange for other goods and services; hence the need for markets

12. Circular Flow Model of a Market Economy

13. Firms purchase the factors of production from the people and then pay them wages for their labor – this is the factor market
People purchase goods and services that firms provide – this is the product market
A successful company sells the right product at the right price
Too expensive or too cheap and the company will go out of business - $100 pencil
According to Adam Smith, it is competition that keeps the marketplace functioning

14. Smith wrote The Wealth of Nations and claimed self-interest is the greatest motivation
Consumers will look for the lowest price
Lower prices are incentives
Producers will look to make the greatest profit
Competition amongst consumers regulates the free-market
Incentives can be monetary or rewards
Smith said the invisible hand will regulate the markets
Transfer payments can be made by governments or businesses for no service ie. Food stamps, social security, even stimulus checks

15. Advantages of the Free Market
Economic Efficiency – self-regulating markets can respond quickly to changes or fads ie. Cabbage patch dolls, Boot Camps, Pokieman
Economic Freedom – free markets have the greatest degree of economic freedom
Economic Growth – competition encourages growth. Entrepreneurs are always seeking an advantage
Additional Goals – free markets offer more choices determined by the consumer – consumer sovereignty

16. Centrally Planned Economy
Chap 2.3

17. Centrally Planned Economy
The government tells firms what to produce and how much
The government owns the land, capital, and tells the labor where to work
There is no competition
There is no consumer sovereignty

18. Socialism: a social and political philosophy that wealth should be equally distributed
Socialism requires central planning
In socialist countries the government owns major industries ie. Trains
Socialist countries could have democracy
Communism: all economic power is in the hands of the government
They believe in the need for a violent revolution
Communist countries cannot allow democracy
True Communism has never existed!

19. Soviet Union Created in 1917 under Lenin, a socialist
Central planning was introduced in 1920 and lasted until 1991
Soviet planners allocated scarce resources to the military and the Space Race
The government created large state-owned farms called collectives
The government monitored output
Soviet planners favored heavy industry, the military, and the Space Race
Consumer goods became the opportunity costs

20. Producers focused on quantity, not quality
There was no incentive
Food, accommodation, luxury items were scarce – but available on the blackmarket

21. Disadvantages of Centrally Planned Economy
Guaranteed jobs removed incentives
Workmanship was poor
Stalin’s Five-year Plans had success in industry but were a disaster in agriculture – why?
There was no place for innovation
Individual freedoms were sacrificed for societal goals
Ultimately most planned economies failed

22. Modern Economies
Chap 2.4

23. Mixed Economy Most countries have a mixed economy – to some degree
However, government involvement has increased because problems have become greater ie. Banking collapse
In America, private property is very important
Society has to prioritize its economic goals and opportunity costs: Should taxes pay for the military? Should the unemployed receive benefits? What should the minimum wage be?

24. Circular Flow Model of a Mixed Economy

25. United States
The United States has a free market economy, but there is government involvement
Laws protect private property and the rule of law
The government tries to act as a referee with few regulations
Foreign investment is encouraged and protected

26. Globalization 26

27. Globalization is the integration of national economies of the world that we may be witnessing operation of a single worldwide economy.
Benefits include: A) Expanded trade with new people and products. B) Income per person has increased in countries that have opened up their economies to globalization. C) Developing countries have seen the benefit of reduced hunger and child labor. D) Increased life expectancy. 27

28. 28

29. Exports per Country Country Exports (2010) World $14,920,000,000,000EU
$1,787,000,000,000
Germany (1)
$1,337,000,000,000
USA (2)
$1,270,000,000,000 29

30. GDP 30