1. Economics 102 The Free Market, Central Planned, Command and Mixed Economy
By Mr. Poitier

2. Why Markets Exist?
Market – an arrangement that allows buyers and sellers to exchange things.
Specialization – the concentration of the productive efforts of individuals and firms on a limited number of activities.
Household – a person or group of people living in the same residence.

3. Why Markets Exist?
Firm – an organization that uses resources to produce a product, which it then sells.
Factor market – market in which firms purchase the factors of production from households.
Profit – the financial gain made in a transaction.

4. Why Markets Exist?
Product Market – the market in which households purchase the goods and services that firms produce.
Self-interest – one’s own personal gain.
Incentive – an expectation that encourage people to behave in a certain way.
Competition – the struggle among producers for the dollars of consumers.

5. Why Markets Exist?
Invisible hand – “Laissez faire” – which means, “Let them do as they please.” Economists use this term to describe the self regulating nature of the marketplace.
Consumer Sovereignty – the power of consumers to decide what gets produced.

6. Advantages of the Free Market
Economic Efficiency – Because it is self regulating, a free market economy responds efficiently to rapidly changing conditions. Producers make only what consumers want, when they want it and at prices they are willing to pay. (ex PS3)

7. Advantages of the Free Market
2. Economic Freedom – Free market economies have the highest degree of freedom of any system. The freedom of workers to work where they want and producers to make what they want.
3. Economic Growth – Because competition encourages innovation, free market encourage growth. Entrepreneurs are always seeking profitable opportunities and contribute new ideas and innovations.

8. Advantages of the Free Market
4. Additional Goals – Free Markets offer a wider variety of goods and services than any other system, because producers have incentives to meet consumers desires.

9. Adam Smith
Adam Smith was author of the Wealth of Nations, published in This book stills stands as the authoritative description of how a market system can flourish.
Smith details in the book that land, labor and capital are factors of production that generate a nations wealth. In Smith’s view, individuals left alone to try to better themselves will produce a multiplication of riches, jobs and goods and services.

10. The Centrally Planned Economy
Central Planned Economies operate in direct contrast to free market systems. Centrally Planned Economies oppose private property, free markets pricing, competition, and consumer choice.
Unlike in a Free Market. A Central Planned Economy dictates what gets produce and consumed. The government answers the Three Economic Questions.

11. THREE ECONOMIC QUESTIONS
What goods and services should be produced?
How should these goods and services be produced?
Who consumes theses goods and services?

12. Central Planned Economy
Central Planned Economy owns the three (3) Factors of Production Land, Labor (They tell where individuals work and wages) and capital.
Since the government, dictates what is produced and the price. Consumers do not have consumer sovereignty.

13. Central Planned Economy
Centrally Planned Economies are often associated with socialism and communism. These terms are often confused but they are different.
Socialism – a social and political philosophy based on the belief that democratic means should be used to evenly distribute wealth throughout a society.

14. Centrally Planned Economy
Communism – a political system characterized by a centrally planned economy with all economic and political power resting in the hands of the central government.
Authoritarian – requiring strict obedience to an authority, such as a dictator.
Collective – large farm leased from the state to groups of peasant farmers.

15. Communism
Karl Marx (Marxism) and Friedrich Engels introduced socialist philosophy in the Communist Manifesto. The term communist was adopted by Vladimir Lenin when he took control of Russia in 1917.

16. The Soviet Union
The former Soviet Union is a great example of how a Centrally Planned Economy works and doesn’t work.
The Soviet Union rose out of the revolutions in Russia The Czar Nicholas II and his family were forced from the throne and machine gunned in the Russian Forest.
The Soviet Agriculture was based on collectives the farms were leased from the state. Workers were guaranteed employment and income. Under this system, farmers had few incentives to grow more or better crops. Heavy Industry – that requires a large capital investment and that produces items used in other industries.

17. Soviet Union
Soviet Consumers suffered due to goods were scarce and poor in quality. (ex. Suit companies made suits poorly stitched and mismatched coats and pants.) People waited in line for hours to buy goods and services.

18. Problems with Centrally Planned Economies
Centrally Planned Economies greatest disadvantage is that performance always fall short of the ideals upon which the system is built.
The government owns all production and workers lack incentive to innovate and work hard. The government actively discourages change.
These economies lack the flexibility to adjust to consumer demands.
This kind of economy sacrifice individual freedom in order to pursue societal goals.

19. Mixed Economy
The Mixed Economy – market based economic system in which government plays a limited role. This mix of economy and government intervention allows for a stable marketplace.
The limits of Laissez Faire have been exposed because some needs and wants of modern society are difficult to answer in the marketplace.

20. Mixed Economy
Private Property – is property that is owed by individuals or companies not by the government. The Constitution protects this right.
A society must assess its values and prioritize its economic goals. Some are better met through the open market and others by government action.

21. Mixed Economy
The government can enter the circular flow of economic activity in many ways. This shows the government role in a Mixed Economy.

22. Government in the Factor Market
Just like a business the government buys the factors of production (Land, Labor and Capital) from households.
Emenient Domain - When property is taken either for government use or by delegation to third parties who will devote it to public or civic use or, in some cases, economic development.

23. Government in the Product Market
Government purchase goods and services in the product market. (Office supplies, telephones, computers, and fax machines)
The government provide certain goods and services through the factor resources that they combine. The Federal, State, and Local Government provide 4 million miles of road.

24. Transferring Money
Governments collect taxes from both households and businesses. Governments then transfer the money they collect to businesses and individuals for a variety of reasons ranging from worker disability to the survival of an industry.
The greatest expenditure of the United States government is Social Security. (Safety Net)

25. Comparing Mixed Economies
The foundation of the United States economy is the free market.
Free Enterprise – is characterized by private or corporate ownership of capital goods. Investments that are determined by private decision rather than by state control and determined in a free market.
Continuum – a range with no clear divisions.
One end of the scale is Centrally Planned and the other end is Free Market. Mixed is in the middle.

26. Mixed Economy with Government Dominates
An economy that is mixed with government domination. This occurs where government owns all the property and all economic output. (Ex. North Korea and China)
The Chinese economy is in Transition – a period of change in which an economy moves away from a centrally planned economy toward a market-based system.
Privatize – to sell state-run firms to individuals.