1. Economic Systems Unit 3

2. 3 Fundamental Economic Questions What goods and services are to be produced? Vanuatu is a small island in the South Pacific. Their economy has always been based on agriculture but now their tourism is growing. They must decide what they will put their limited resources towards. https://www.youtube.com/watch?v=TEB4mAonQX A https://www.youtube.com/watch?v=TEB4mAonQX A

3. 3 Fundamental Economic Questions How are goods and services produced? What combination of the factors of production will be used to create the goods and services of a society. In the U.S. most businesses get to decide this for themselves, but that is not the case in all societies.

4. 3 Fundamental Economic Questions For whom are goods and services to be produced? Who gets what? Who deserves what? Goods and services are distributed in a variety of ways: – Ability to pay-what we are used to – Equal distribution-U.S.S.R. – First come; first served – Distribution according to need

5. Economic Goals A society’s answers to these questions will depend on their values and economic goals Economic Freedom-we place a high value on the ability to make our own decisions without interference Economic efficiency-all societies want to make the best use of its resources. Full employment is a goal for all societies

6. Economic Goals Economic equity-this goal is difficult to achieve because there are differing definitions of equity – Some regard economic equity as everyone having an equal opportunity to achieve economic prosperity – Some believe economic equity means everyone gets their fair share of the economic pie; equal distribution of economic wealth – As of 2011…the top 1% of the United States owns 43% of the wealth in the nation. http://www.washingtonpost.com/blogs/wonkblog/files/ 2013/09/Ae0VQFM.gif

7. Economic Goals Economic growth- societies all want to increase the amount of goods and services that are produced Economic security- this is another goal where many disagree about its importance – All societies have members who cannot provide for themselves – How a society decides if or how they will take care of those who can’t take of themselves will depend on what it values

8. Economic Goals Economic Stability- every society wants their goods and services to be available to those who need or want them Stability occurs when everyone has access to the goods and services they need

9. Economic Systems An economic system is the way a society coordinates the production and consumption of goods and services We will learn about 4 different type of economic systems in this unit: Traditional Command Market Mixed

10. Command- Centrally controlled, where the government makes all economic decisions (Security, Equity) Market- Consumers drive all the economic decision(Freedom, Efficiency) Traditional- Family or community based economic system that relies on custom or ritual to drive economic decisions(Stability, Security) Mixed- Consumers and the government drive all the economic decision 4 Economic Systems

11. Traditional Economies First and oldest economic system Most current traditional economies that survive today belong to indigenous people who live much like their ancestors did hundreds of thousands or thousands of years ago Masai of East Africa measure wealth in terms of cattle and children; they are semi-nomadic herders The highest goals of a traditional economy are economic security and stability https://www.youtube.com/watch?v=e8JzaVbdxTI&list=PL BEgyQ49zuIegSWCemPQWxYjP3GlFBfNe

12. Command Economies In a command economy the decisions about what, how, and for whom to produce goods and services are made by a powerful ruler or some other authority The four River Valley Civilizations were all command economies

13. The Industrial Revolution and Capitalism During the Industrial Revolution new inventions and manufacturing created growth in industries Investors-capitalists- grew wealthy by accumulating capital; machines, factories, railroads. Capitalism is now the term synonymous with the free market system used during the Industrial Revolution Standards of living improved for most but many blamed the capitalists for exploiting workers and keeping them in poverty

14. Reaction to Capitalism After the Industrial Revolution there were pushbacks to capitalism In 1848 Karl Marx and Friedrich Engels published the book The Communist Manifesto which advocated the overthrow of capitalism http://10.202.3.241/SAFARI/montage /playlistedit.php?SearchType=my&Ac tion=MakeActive&playlistkeyindex=1 1177&location=local&newlessonfrom playlisthttp://10.202.3.241/SAFARI/montage /playlistedit.php?SearchType=my&Ac tion=MakeActive&playlistkeyindex=1 1177&location=local&newlessonfrom playlist=

15. Socialism/Communism in Theory Their book advocated socialism and then communism Socialism- a political and economic philosophy that calls for property to be owned by society as a whole for the equal benefit of all Communism-(would be the final phase of socialism)- a political and economic system in which all property and wealth are owned by all members of the society. No class differences. “From each according to his ability, to each according to his needs.”

16. Communism in Practice The U.S.S.R. became the first modern command economy in 1917. It became an authoritarian oligarchy controlled by the Communist Party leaders Private ownership of property was forbidden. The state owned the factors of production Economic planning was done by government committees of economists, production experts, and political officials who attempted to perform the function of markets. http://10.202.3.241/SAFARI/montage/playlistedit.php?Se archType=my&Action=MakeActive&playlistkeyindex=111 77&location=local&newlessonfromplaylisthttp://10.202.3.241/SAFARI/montage/playlistedit.php?Se archType=my&Action=MakeActive&playlistkeyindex=111 77&location=local&newlessonfromplaylist=

17. The committees decided how to use the factors of production, what would be produced, for whom it would be produced, and they also set prices and wages. This was supposed to ensure economic security and equity This ignores the incentives matter principle- no way to fire bad workers and no way to reward productive workers Led to shortages and low quality products Eventually the economy collapsed leading the end of the USSR China is now the largest command economy in the world http://www.youtube.com/watch?v=InqAzvX6UrI

18. Market Economy Market economy depends on the decisions of individual producers and consumer to coordinate its activities “the Market”- the economic system where buyers and sellers exchange goods and services Free market- no one single person, government, business tells producers and consumers what to do

19. Circular Flow Model Household- a person or group of persons living together; Households own the factors of production Firm- an organization that uses these factors to make and sell goods or services The model uses two kinds of markets Product market- goods and services are sold by firms and purchased by households Factor market- households sell their labor, land, and capital to firms Factor payments- wages for labor, land rental, stock investments, etc.

20. 20 Product Market Factor Market Businesses Individuals Goods and Services $$$ Revenue $$$ $$$ Spending $$$ Goods and Services SUPPLYDEMAND SUPPLY $$$ Costs $$$ Resources $$$ Income $$$ Resources (Factors of Production)

21. Mixed Economy Mixed economy- both the government and individuals play roles in regard to production and consumption Every nation with a mixed economy must choose its own balance between market freedom and gov’t involvement At minimum, gov’t is needed to establish the institutions that enable the markets to function – Legal system for laws and contracts – Currency system-Federal Reserve Bank

22. Government Involvement Some countries want their governments to get more involved in the economy: – Child labor laws – Regulation of pollution – Regulation of drugs, food, cosmetics Public Works- certain goods and services that governments can provide that markets do not always provide or do not provide enough of Dams, highways, sewer systems, bridges, etc. The markets do not provide them because the cost of providing them “could never repay the experience to any individual or small number of individuals” Adam Smith

23. Government Involvement Different countries offer different things to their citizens, in Canada and much of Europe they offer: – Health to every citizen – College education to every citizen – Day care to every family

24. Flow of Money in a Mixed Economy Governments enter the flow in numerous ways They purchase land, labor, and capital from households in the factor market U.S. government employs 2 million people; nation’s largest employer Gov’t purchases goods and services from firms in the product market U.S. government is also nation’s largest consumer Governments will also produce goods and services; libraries, schools, police stations, museums Gov’t will then transfer money back to households Social security checks, welfare payments, and unemployment benefits are transfer payments

28. Characteristics of the U.S. Economy Free enterprise system- individuals own the factors of production and make decisions about how to use those factors within the framework of the law Characteristics of Free Enterprise system – Economic Freedom – Competition – Equal opportunity – Binding contracts- agreements between buyers and sellers

29. Property rights- the rights to own land, buildings, or other goods to use or dispose of them as they choose intellectual property- creations of the mind that have commercial value Patents-gives an inventor the sole right to make, use, or sell his or her invention Copyright- gives the creator of a literary or artistic work the sole right to reproduce, distribute, perform, or display the copyrighted work Profit Motive- the desire to make a profit Profit is the money earned by a business after subtracting the costs of operation

30. Limited Government – Protecting property rights and contracts – Promoting the general welfare – Preserving competition – Protecting consumers, workers, and the environment – Stabilizing the economy We as a nation are still deciding to what extent we want our government to get involved in the economy.