Economic Systems and Opportunity Cost

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Transcript Economic Systems and Opportunity Cost

4 Economic Systems of Gov’t:
• Market Economy
• Command Economy
• Mixed Economy
• Traditional Economy
Economic Systems
• A country’s economic system answers the
3 basic questions:
• A. what to produce
• B. how to produce it
• C. for whom it is produced
Market Economy-also known as capitalism-these
decisions are made in free markets by the
interaction of supply and demand.
• Private citizens own the factors of production-not the gov’t
• Businesses are driven by profit-motive and decide what to
• Consumers make their own decisions about what to produce
• Supply and demand interact to set price; producers and
consumers base their decisions on price
• A market economy is decentralized-decisions are made by all
the people, not just a few.
Role of gov’t in US Economy
• Provides public goods and services
• Regulates businesses to make sure
markets stay competitive
• Works to reduce negative externalities and
increase positive externalities
Command Economy-central gov’t makes the major
economic decisions
• Individuals have few choices and little influence over the economy
• Also called controlled economy, socialism, or communism
• Gov’t owns most productive resources, especially land and capital
• Gov’t makes the 3 basic decisions
• Gov’t fixes the wages of workers and sets prices
• Command economies can be very ineffieient resulting in slower
growth and lower GDP (Gross Domestic Product).
– Two leading command economies are Cuba and North Korea.
Mixed Economy-combines basic elements of a pure market
economy and a command economy.
• Combines private ownership or property and individual decisionmaking with gov’t intervention and regulations.
• The US is a mixed economy-where individuals make decisions
based on market phenomena.
• Our gov’t makes laws to protect private property and regulate areas
of business.
Today, many nations have changed from command economies to more
of a market economy.
• For example, countries in the former Soviet Union and even China
are making strides toward a more market economy.
• Command economies were not able to achieve the economic growth
that market economies had.
• The Soviet Union broke into separate countries in 1991 b/c
Communist leaders cound not keep the economy going.
• It has been a difficult transition for the Russian economy.
• State owned factories have been switched to private ownership,
stock markets have been created, etc.
• In the 1980’s, China began to introduce market reforms and began
to convert factories to private ownership. It also set up a stock
• This has resulted in a growing economy over the past 30 years.
Traditional Economy-economic decisions of what, how, and
for whom to produce are based on custom or habit.
• The country’s economy and way of life are passed down from
generation to generation.
• Decisions are usually made by a small group, tribe, or religious sect.
• They are usually poor, developing countries with a high rate of
population growth and a declining GDP.
• People have a smaller share of what the economy produces.
• Traditional economies are usually landlocked and do not have
access to ocean trade; others lack many natural resources
• Many developing traditional economies have suffered through civil
wars that have destroyed roads, bridges, factories and other
• Some traditional economies borrow large sums of money to spur
economic growth which means they owe more money than the GDP
they produce in a year.
Assignment: Due 11/09/09
• Fold the legal size paper so that you have
four quadrants
• Label each quadrant with one of the four
economic systems of gov’t
• Illustrate each of the economic systems
– Illustrations must include color
Systems of Government
• Quiz answers
Anarchy__1. absence of government
Communism__2. authoritarian party that controls the economy; government of China and the former USSR
Theocracy___. government where the ruler is considered divine
Dictatorship__4. government that takes over by force or fear
Democracy__5. government based on the rule of the people
Monarchy__6. government ruled by an individual who is usually a king or queen
Autocracy__7. rule by one person
Oligarchy__8. rule by a group of persons
Authoritarian__9. type of government where power is held by an individual or group who is not accountable
to citizens
Totalitarian__10. type of government where the ruler changes all areas of the government or country
11. Identify a dictator and his country. Castro/Cuba; Hitler/Germany; Hussein/Iraq
12. Name the type of government in which the federal and state governments share power. federalism
A. totalitarian
B. autocracy
C. monarchy
D. oligarchy
E. anarchy
F. authoritarian
G. communism
H. dictatorship
I. theocracy
J. democracy
ECF Records Company
• ECF records produced 5,000 CDs last
month. It sold each of these CDs for $10.
The rent for the studio was $3,000/month.
Power to operate the machines cost $500.
The costs for the musicians were $12,000.
The commercial printer cost $400 per
month to rent. The materials used to
produced the CDs, cases, and packaging
were $4,000.
1. Identify the capital good(s) mentioned
• Any machines
• Commercial printer
• Materials used to produce the CD’s,
cases, and packaging
• Studio
2. Identify other resources used for
• Musicians
• Power
3. Were there any natural resources (land)
used? If so, what?
• Approximately half an acre of land
4. Identify the fixed costs; calculate the total
fixed costs.
• $3,000 Rent
• $400 Printer Rent
• $3,400 = total fixed cost
5. Identify the variable costs; calculate the
variable costs.
• $500 Power
• $12,000 Labor
• $4000 Packaging and Materials
• $16,500 total variable cost
6. What is the total cost? Calculate the total
• Total Cost- addition of variable and fixed
• $3,400
• $16,500
• $19,900 = Total Cost
7. Define average total cost; calculate the
revenue generated.
• Average total cost- when a business
divides the total cost by the quantity
produced to calculate cost per good.
• $19,900 divided by 5,000 CDs = $3.98 per
CD produced
8. Define revenue; calculate the revenue
• Revenue- incoming funds
• 5,000 CDs multiplied by the $10 cost of
each CD = $50,000
9. Define profit; calculate the profit.
• Profit- the amount of revenue left after
total costs have been deducted
• $19,900 subtracted from $50,000 =
10. Define opportunity cost.
• Opportunity cost- what is given up when
another choice is made
11. What would be the opportunity cost of
purchasing four CDs for someone who loves
cheeseburgers if a cheeseburger costs $5?
• 8 cheeseburgers
12. If it costs $19,901 to produce 5,001 CDs, what
is the marginal cost of producing another CD?
5,000 = $19,900
As compared to
5,001 = $19,901
Then the one extra CD costs $1.00 as
compared to the $3.98 per CD for the first
5,000 CDs produced
13. If the selling price remains constant, what is
the marginal benefit of selling another CD?
• $3.98 - $1.00 = $2.98 is the marginal
benefit of selling another CD
14. Assuming the factory can sell additional CDs,
would it be profitable to produce more? Why or
why not?
• Yes, it would be profitable to make more
CDs because the additional CDs are much
less expensive to produce and will result in
additional profit per CD.