1. Explorations in Economics Alan B. Krueger & David A. Anderson

2. Chapter 2: Comparing Economic Systems -Module 4: Using Resources to Achieve Economic Goals -Module 5: Types of Economic Systems -Module 6: The Modern Market Economy

3. MODULE 4: Using Resources to Achieve Economic Goals KEY IDEA: Every society must determine how to use its resources to achieve its economic goals. OBJECTIVES: To explain the three basic economic questions. To identify five economic goals that societies pursue. To describe tradeoffs made among the five goals.

4. THE THREE BASIC ECONOMIC QUESTIONS 1. What should be produced? 2. How should it be produced? 3. For whom should it be produced?

5. What should be produced? Resources are limited. TRADEOFF If more of some goods are produced, less of others must be produced. 12/20/2015Chapter 2: Modules 4,5 & 6

6. How should it be Produced? Requires choosing which combination of resources to use in the production of each good and service. Example: assemble parts by hand, or use industrial robots. There is more than one way to produce and different ways to use different combination of resources. if a method wastes resources, production is inefficient. 12/20/2015Chapter 2: Modules 4,5 & 6

7. For Whom Should It Be Produced? Should some people get two pairs of jeans while others have none? Because people don’t agree about what is fair and what is best, the “For whom?” question creates frequent and heated public debates. Is the distribution of goods efficient or fair? Healthcare 12/20/2015Chapter 2: Modules 4,5 & 6

8. SOCIETY’S ECONOMIC GOALS The standard of living is a measure of comfort in terms of the goods and services available. Economic Goals: Economic Growth Efficiency Equity Economic Security Economic Freedom

9. Equality the quality of being just and fair Equality of Opportunity: They believe that everyone in a society should have the same opportunities in life. The idea that is that if there are equal opportunities for quality education and jobs and yet people end up with unequal outcomes, it is the fair and just result of the choices individuals make.

10. Economic Security a social safety net, which can be any form of government assistance for those with financial needs Unemployment insurance, workers’ compensation (victims of work related injuries), social security (retired and disabled), and supplemental nutrition assistance (to put food on the table of low-income households) 12/20/2015Chapter 2: Modules 4,5 & 6

11. Economic Freedom The benefits from making the best choices are lost when people are not free to make those choices. Economists see cash as a great gift, because the recipient can choose whatever he or she wants to buy with it. Economic Freedom: people can make economic decisions for themselves. People prefer to live in a country where they are free to choose where to live, what goods and services to buy, and what type of work to perform. 12/20/2015Chapter 2: Modules 4,5 & 6

12. Sustainability Which is the ability to continue actions indefinitely. A society with a pleasing level of production would at least like to sustain that production and the standard of living it supports. Current production levels are unsustainable if they are being used up faster than they become available. For instance, if farmers overwork their land, nitrogen and other nutrients in the soil are depleted, and crop production falls. 12/20/2015Chapter 2: Modules 4,5 & 6

13. TRADEOFFS AMONG GOALS Tradeoffs force societies to prioritize among economic goals. When the gains from change exceed the losses, it is possible to achieve an improved standard of living without neglecting the goals of equity and economic security.

14. What is… A. Standard of living? B. Equity? C. Efficiency? D. Economic security? E. Social safety net? F. Economic freedom? J. Economic growth? MODULE 4 REVIEW

15. MODULE 5: Types of Economic Systems KEY IDEA: A country’s economic system determines how well it can achieve each economic goal. OBJECTIVES: To explain what an economic system is and how incentives play a role. To describe the features of a traditional economy, a command economy, a market economy, and a mixed economy.

16. ECONOMIC SYSTEMS AND INCENTIVES An economic system is an organizational structure for addressing what, how, and for whom to produce. An incentive is the prospect of a reward or punishment that influences a decision or motivates greater effort.

17. TRADITIONAL ECONOMIES In a traditional economy, decisions about resources are made by habit, custom, superstition, or religious tradition.

18. COMMAND ECONOMIES In a command economy, central planners make the important decisions about what, how, and for whom to produce. Communism is a political- economic system under which all resources and businesses are publicly owned and economic decisions are made by central authorities. Socialism is an economic system under which most resources and businesses are publicly owned and economic decisions are made by groups of workers and consumers.

19. MARKET ECONOMIES In a market economy, most key economic decisions are made by business owners and consumers. In a capitalist system, most resources and businesses are privately owned. A free- enterprise system is an economic system based on private(individual or business) ownership of resources and voluntary exchange.

20. MIXED ECONOMIES A mixed economy combines a market economy with significant government involvement and elements of tradition. Governments in market economies have expanded their roles in the pursuit of equity, economic security, and sustainability.

21. Traditional Economies: Three Economic Questions: “We do it the way we’ve always done it. “ “What has always been produced” “The same way we’ve always produced it.” “ For the people who have received our products in the past.” Decisions require very little planning, and people in traditional economies just do what is expected, which is the same as what has always been expected. Part of Africa, or in traditional agricultural villages, or the Amish 12/20/2015Chapter 2: Modules 4,5 & 6

22. Traditional Economies the incentives include social approval for performing well at a traditional role and disapproval for rebelling against traditions or performing poorly. Exposure to outsiders is often limited, much behavior is determined by established patterns. 12/20/2015Chapter 2: Modules 4,5 & 6

23. Traditional Economy: Advantages Tend to provide economic security Sustainable economy because they tend to grow very slowly Can achieve a relative equitable distribution of goods and services 12/20/2015Chapter 2: Modules 4,5 & 6

24. Traditional Economies: Disadvantages Rarely achieve the goals of economic freedom, economic growth, and a high standard of living. Equity can also be a problem if the standards of the community are unfavorable to certain groups, such as women. Some societies resist the adoption of new technology, such as electricity or the internet that contribute to education, health, and comfort. Your freedom would be limited because your future is predetermined based on your family or the judgment of the village elders. 12/20/2015Chapter 2: Modules 4,5 & 6

25. COMMAND ECONOMY In each type of command economy, key resources and businesses are owned by groups of workers or by the government, rather than by private individuals Tight control over economic decisions and activities. Central planners assign production quotas for factories. China, North Korea, Cuba 12/20/2015Chapter 2: Modules 4,5 & 6

26. Incentives in a Command Economy Incentives in a command economy come from the government. Rewards and punishments are given to the managers of factories, transportation systems, schools and other key enterprises. 12/20/2015Chapter 2: Modules 4,5 & 6

27. Command Economies: Advantages Provide economic security, central planners guarantee employment by assigning every person to a job that is part of the plan. Basic needs, such as housing, education, and medical care are provided by the government without charge. Command economies have the ability to adjust rapidly to changing circumstances. It can shift resources away from other types of production into industries of computers, bridges, or missiles quickly. 12/20/2015Chapter 2: Modules 4,5 & 6

28. Command Economy: Disadvantages Economic freedom is sacrificed to ensure that every part of the central plan is obeyed. People cannot start a business or change jobs in a command economy without government permission, if at all. The standard of living in command economies is low despite the abundance of jobs. Since those who run the businesses don't get to keep the money they earn, there are few incentives to work hard, to innovate, or to use resources efficiently. Leading to weak economic growth. Consumers face a shortage of consumer goods and the government must resort to rationing. Fail to achieve acceptable levels of equity. High officials, top bureaucrats, and military officers typically fare better in a command system. 12/20/2015Chapter 2: Modules 4,5 & 6

29. Market Economies Market economy: most key economic decisions are made by business owners and consumers. Business owners are free to produce and how to produce it, and business sell their products to whoever chooses to buy them. The United States is a primary example of a market economy. Along with Canada, England, France, Germany, Japan, and Singapore. 12/20/2015Chapter 2: Modules 4,5 & 6

30. Incentives in a Market Economy: Gains and losses that follow from the economic choices of business owners and consumers. Any exchange in a market economy must benefit both sides or it wouldn't be carried out voluntarily. 12/20/2015Chapter 2: Modules 4,5 & 6

31. Market Economy: Advantages The availability of desirable goods is one reason market economies create higher living standards Efficient production methods are another reason for high living standards in market economies. Market economies tend to have rapid economic growth, largely because they encourage discovery and innovation. Market economy allows more economic freedom for consumers and businesses than traditional or command economies. People are free to make their own choice about where to work and what to buy with the money they earn and businesses can decide what to produce and how to produce it. 12/20/2015Chapter 2: Modules 4,5 & 6

32. Market Economies: Disadvantages Equity: There is no central plans or strong traditions to ensure everyone has a job. Resource conservation is another challenge. When individuals decide how to use resources, they may overlook the effects of their decisions on the environment and on future generations. Finally, the powerful incentives in market economies can lead to behavior that goes against society’s goals. Example: drug companies to rush new medications to the market without adequate testing. To avoid problems such as these, governments can intervene with laws for the protection of society  Mixed Economy 12/20/2015Chapter 2: Modules 4,5 & 6

33. Mixed Economy Combines a market economy with significant government involvement and elements of tradition. All modern economies are mixed economies. Example: in the U.S. government agencies make key decision about public services including national defense, education, and police protection. Also, government regulates activities that could present harm to society if left unchecked, 12/20/2015Chapter 2: Modules 4,5 & 6

34. ECONOMIC SYSTEMS

35. MODULE 5 REVIEW What is… A. Economic system? B. Traditional economy? C. Incentive? D. Command economy? E. Communism? F. Socialism? G. Rationing? H. Market economy? I. Capitalist system? J. Free- enterprise system? K. Mixed economy?

36. MODULE 6: The Modern Market Economy KEY IDEA: In modern market economies, government participation can support market exchanges and improve economic performance. OBJECTIVES: To explain the relationship among households, firms, and markets in a market economy. To explain the government’s role in a market economy. To describe how the government fits into the circular flow model of the economy

37. A household consists of an individual or a group of people who live together and share income, such as you and your family. HOUSEHOLDS, FIRMS, AND MARKETS 1. Households purchase goods and services from businesses. 2. Households provide land, labor, capital, and entrepreneurship (resources) from which goods and services are produced.

38. HOUSEHOLDS, FIRMS, AND MARKETS A firm is a privately owned organization that produces goods or services and sells them to others.

39. THE SIMPLE CIRCULAR FLOW

40. Product markets are where goods and services are exchanged for money. Factor markets are where resources are exchanged for money.

41. GOVERNMENT’S ROLE IN A MARKET ECONOMY 1. A government can establish and enforce rules that improve market performance. 2. A government can provide important goods and services that private individuals tend not to purchase. 3. A government can help improve economic security, equity, and sustainability.

42. GOVERNMENT IN THE CIRCULAR FLOW

43. Government in the Circular Flow

44. Module 6 Review What is… A. Household? B. Firm? C. Circular flow diagram? D. Product market? E. Factor market?