Transcript What is an Economy? - zone4socialstudies

What is an Economy?
• Economics is the study of how individuals and
governments use scarce resources to produce and buy
the goods they want/need.
• Scarcity – the problem of limited resources
• An economy is a system that deals with scarcity.
•
Each economy deals with scarcity in its own way.
Every economy must answer the 3 basic economic
questions.
(1) What goods are produced?
(2) How should goods be produced?
(3) For whom should goods be produced?
(and how much?)
• In order to produce goods, you need to have a supply of
the means of production: land, labor & capital.
• LAND: natural resources that come from the Earth
(land). Examples: oil, soil, minerals, water, air, fish, deer
• LABOR: the efforts of people to make the goods. You
need a labor force that is trained for its job.
• CAPITAL: the money or other assets needed to
produce goods. Factories, equipment, machines,
transportation, power stations, communication services
are all capital.
The 3 Economic Systems
• Every economy answers the 3 questions differently, but
there are 3 basic types of economies:
(1) Market economy – also known as free market, or
capitalism
(2) Command economy – also known as centrally
planned economy.
(3) Mixed economy
Market Economy
• a market exists when people wanting to buy
goods/services meet freely with others who want to sell
goods/services.
• in a market economy, the government DOES NOT get
involved and the 3 economic questions are answered
by private individuals.
• U.S.A. = best example of Market economy
PRODUCERS sell
goods to consumers
for money.
PRODUCERS
supply the goods
consumers
want/demand.
CONSUMERS sell
services (labor) to
producers for money
(wages).
CONSUMERS
demand certain
goods.
Command Economy
• In a command economy the government makes most or
all of the economic decisions.
• The gov’t owns/controls the means of production and
answers the 3 economic questions.
• Karl Marx – first came up with ideas for the command
economy, thought that workers would overthrow
capitalism because they were being exploited.
• Soviet Union = best example of Command economy
Mixed Economy
• A mixed economy has economic freedom for individuals
but the government also has some control over the
economy.
• Example: Canada seems like it has a market economy,
but the gov’t owns some companies and controls some
resources. Gov’t also funds things like health care.
The Economic Spectrum
• We can organize the 3 economic systems on a spectrum
based on the level of government involvement.
• In reality, no system is a pure command or market
economy.
The Market Economy & the U.S.
The Basics
•
•
All economies must deal with the problem of scarcity.
Market economies answer this problem by allowing private individuals the
freedom to control the means of production and make decisions out of their
own self-interest.
•
In theory, if everyone does what’s best for themselves this will benefit the
entire society/country.
•
Producers make decisions based on profit motive – trying to make the most
money they can.
•
The law of supply and demand controls economic decisions in a free
market.
•
Equilibrium price – the price that producers are willing to sell at, and
consumers are willing to buy at  arrived at through the law of suppy &
demand.
PRODUCERS
sell goods to
consumer for
money.
PRODUCERS
supply the goods
consumers
want/demand.
CONSUMERS
sell services
(labor) to
producers for
money (wages).
CONSUMERS
demand certain
goods.
Key Features
• Consumer sovereignty – people have the freedom to
buy/not buy whatever they want
• Producers will use advertising to try and influence
consumer decisions.
• Competition between different producers is important
because it results in lower prices and higher quality
goods.
• Private ownership – the means of production are owned
by individuals not the gov’t.
• Consumer rights & responsibilities – the gov’t will protect
consumer rights to have choice and be safe, the gov’t
will prevent monopolies and unsafe practices. In return,
consumers have the responsibility to obey laws and
follow directions.
Pros & Cons
• Advantages: - lots of freedom/choice, encourages
individual responsibility and self-reliance, encourages
efficiency and innovation
• Disadvantages: - lack of direction/control  boom/bust
cycle & instability, unsafe products, large gap between
rich/poor, lack of social programs (health care,
unemployment, etc.)
More on the American Market Economy
Labour Unions
• Labour union – an organized group of workers with the
goal of protecting worker rights (securing fair wages,
benefits, job security, etc.)
• The goals of workers and unions often come into conflict
with the goals of their employers (producers). Treating
workers well is often expensive.
• Unions will pressure gov’t to make laws that benefit
workers.
• Unions also engage in collective bargaining with
employers. This is where they negotiate contracts for all
workers in a certain business that guarantee wages,
working conditions, etc. for a period of time.
– Ex: The lockout during the NHL season in 2004-2005 was
because the NHLPA (union of players) and the NHL (the
employer) could not agree on a new collective bargaining
agreement.
Corporations
• Corporation – a group of people who all own a company
together as a group.
• In the USA, corporations have the same rights as people
(can buy/sell property, borrow money, be sued by
people, etc.)
• Limited liability – because corporations are owned by a
large number of people (stockholders) each individual is
liable (responsible) for only the % of the corporation that
they own.
• People who own more shares in a corporation can make
more profit, but take the risk of losing more money.
Role of Gov’t in USA
• In theory, the gov’t NEVER gets involved in a market
economy.
• No country (including the US) is a pure market economy,
so the American gov’t does get involved in small ways.
• Anti-Trust Laws – prevent monopolies, protect
consumers’ right to choice
• During the Great Depression (1930s) between 20-40%
of Americans were unemployed. All citizens (even those
with jobs) struggled to make enough money just to
survive.
• Because gov’t stayed out of the economy, there was no
where for the people to turn for help.
• UNTIL…
• “The New Deal” – President Franklin D. Roosevelt
started a plan that involved the gov’t spending money to
help people out by creating jobs and gov’t agencies to
help those in need.
• The New Deal helped people survive through the
Depression.
• Today, the U.S. gov’t still tries to stay out of the economy
as much as possible.
• Gov’t involvement in the U.S. is limited mostly to
protecting consumer rights and regulating the business
cycle. Some social programs (ex: unemployment
insurance) still exist too.
• The U.S. also has progressive income tax. This means
people who make more money pay more taxes.
Canada’s Mixed Economy
• Remember the economic spectrum:
---Centrally Planned------------------Mixed-----------------Market-----
• Mixed economies fall in the middle of the economic spectrum
because they have economic freedom for individuals but there is
also gov’t ownership and involvement in the economy.
• In Canada, the 3 economic questions are answered by both gov’t
and private individuals.
• Gov’t will buy companies or bail out industries that are in trouble in
order to protect jobs. Ex: payments given to farmers during the mad
cow crisis.
• Gov’t will own companies in industries that are too risky/expensive
for private individuals to get involved in. Ex: building the railroad
across Canada.
• Gov’t owned organizations are known as crown corporations. Ex:
CBC
• Most of Canada’s gov’t involvement is to provide services and
protect equality. Examples: health care, education, employment
insurance.
•
Economic decisions in Canada are made by both the private and public
sectors. Private sector includes individual citizens, households, small
businesses, and large multinational corporations. Public sector = gov’t.
•
Downside to mixed economies  HIGH TAXES  needed to pay for gov’t
services.
The most important belief/value in the mixed economy is equality. All
people should have a chance to succeed in life and have their basic needs
met.
•
•
Opportunity cost – the sacrifice of one choice to get another. (Example: I
decide to buy a Wii, and as a result I can’t afford to buy an Xbox 360)