1. Adam Smith’s Market Economy Economic Logic of a Market System AP Macroeconomics

2. All Economic Systems Allocate Resources Market Command Traditional Every Economic System has to answer 3 Questions: 1) What to Produce? 2) For whom to Produce? 3) How to Produce it? (or when to produce)

3. Society will choose an economic system based on goals: Economic Goals & Social Goals WHAT ECONOMIC SYSTEM? Which Economic System? Growth Employment Efficiency Stability Justice Equality Environment Freedom

4. Adam Smith (1723-90) Founder of Free Market Economics Argued: Free markets best promote the social welfare Government should generally not interfere! “The Wealth of Nations” Published in 1776

5. "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” “We address ourselves, not to their humanity but of their advantages." Adam Smith Self-interest is our incentive to work hard End Result:

6. Reading: The Free Market at Work Scarce Resources High Prices

7. Adam Smith & The Invisible Hand People follow their own self-interest Threat of competition keeps people honest Markets naturally self-regulate Invisible Hand Government should not Interfere!

8. Review Wealth Creation & Free Market Scarce Resources Please buy my Vulture

9. HOW WHAT FOR WHOM MARKET SYSTEM Market Economic System Summary Production Growth & Efficiency Supply & Demand Price Benefits Costs Tremendous consumer choice ↑ career opportunity Unlimited Upside ($) Strong incentive to innovate Low prices & high quality Creates wealth Generally self-regulates High Stress ↑ incentive to cheat ↑ inequality (rich-poor gap) ↑ environmental impact

10. Command Econ Systems Soviet Union “adopts” command economic system –i.e. communism General Philosophy: –Government controlled economy ( centrally planned ) –stressed equality & the common good ( collective society ) Economic Incentive to innovate, work hard ? –Work hard for the “collective” good of society –Shortage of a good => what happens? Karl Marx 1848

11. Self-Regulation vs. Central Planning Market EconomyCommand Economy Shortage of A Good? Invisible Hand

12. Economic Systems Trade-offs Efficiency vs. Equity –Free markets systems focus on efficiency –Command systems focus on equity Efficiency means society gets the most from its scarce resources Equity means the benefits of scarce resources are distributed fairly in society (not necessarily equally!)

13. HOW WHAT FOR WHOM MARKET COMMAND TRADITIONAL Economic System 3 Questions for each Economic System Growth & Efficiency Supply & Demand Price Equality Gov’t or Central Planner Employment Need [Tradition] Need/ NecessityStability “to produce” “to produce” “to produce”

14. Cuba’s Future? https://www.youtube.com/watch?v=r3ZnaLuqMCo

15. Traditional Economic System

16. HOW WHAT FOR WHOM MARKET COMMAND TRADITIONAL Economic System 3 Questions for each Economic System Growth & Efficiency Supply & Demand Price Equality Gov’t or Central Planner Employment Need [Tradition] Need/ NecessityStability “to produce” “to produce” “to produce”

17. Bhutan Video: Traditional Economy BenefitsCosts https://www.youtube.com/watch?v=CXJwNSkdTH0 https://www.youtube.com/watch?v=2jf9xrnUjpI 11 min. https://www.youtube.com/watch?v=SPujYdcWCFU 3 min

18. Bhutan June 2011 Typical Village