Transcript Government

Objectives
A. Traditional – “Custom rules”
B. Command – “Government rules”
C. Market – “Individuals rule”
D. Mixed
1.) Capitalism
2.) Communism
3.) Democratic Socialism
Why do we have Economic Systems?
 Survival for any society depends
on its ability to provide food,
clothing, and shelter for its people.
 The Economic System is the
organized way a society provides
for the wants and needs of its
people.
PRIVATE
PROPERTY
ROLE OF
SELF-INTEREST
FREEDOM OF
ENTERPRISE
& CHOICE
COMPETITION
PRIVATE
PROPERTY
ROLE OF
SELF-INTEREST
MARKETS
& PRICES
FREEDOM OF
ENTERPRISE
& CHOICE
COMPETITION
ACTIVE, BUT
LIMITED,
GOVERNMENT
1. Private Property – the right of individuals to
exercise control over things owned. Freedom to
negotiate binding legal contracts.
Contracts are legally binding in oral or written form.
[A verbal agreement is binding only if it involves a small sum of money
over a short period of time and does not involve real estate purchases.]
2. Freedom of Enterprise (business) & Choice
Can move within the economy to any job, to
buy or sell property, or start a business.
The consumer is “sovereign” (king) in the economy. His
dollars vote as it is he who decides what gets produced.
The U.S. has over 100,000 business failures each year.
3. Role of Self-Interest–each producer or consumer
tries to do what is best for themselves. Self interest
is the main force driving the economy.
Producers aim for maximum profits.
Consumers seek the lowest prices & highest quality.
K-Mart?
4. Competition – economic rivalry of a large number of
buyers & sellers. [central mechanism of market economy]
Monopolies become fat & unresponsive to consumers
(higher prices & fewer choices). Competition prevents
one seller from controlling the market. Monopolies are
“price makers”. It is better to have “price takers”
who are at the “mercy of the market.”
A monopoly’s attitude is:
“We don’t care.
And – an appendage
to be named later,
like a -
We don’t have to.
We’re a monopoly!”
Monopolies can charge
“Competition” and
“self-interest” are like
an “invisible hand”.
an arm and a leg.
So, the “invisible hand” refers to the way a market
economy manages to harness the power of self-interest
for the good of society.
5. Markets & prices. Markets bring the buyers and sellers into contact.
We have “Market Inventors”
like AL GORE!!!
Prices send signals.
High prices send signals to increase
production and for other producers to enter the market.
Low prices send signals
to decrease production
and for producers to exit the market.
6. Limited Government Intervention in the economy.
The role of government was one of “laissez faire.” [“hands off”]
In the words of Adam Smith, the government should not interfere with
the operation of the economy except serve as an arbitrator in settling
disputes.
The government’s role:
(according to Smith)
a. provide defense,
b. administer justice, and
Arbitrator
c. maintain certain public institutions.
The government controls about 1/3 of economic activity. [settling disputes]
• Protector
– The government makes and enforces laws against:
• False advertising, unclean food and medicine,
pollution and unsafe products
– Enforces laws against discrimination in the work place.
– The government enforces contracts.
• Provider and Consumer
– Provides products & services that businesses don’t provide,
like: schools, roads, an army, and welfare.
– The government is also a consumer because it buys things
from businesses, like: fighter jets, aircraft carriers,
submarines and tanks.
• Regulator
– The government regulates or makes rules for businesses to
follow. For example, the government decides which
frequency radio stations can broadcast on. The government
also makes rules for running nuclear power plants & so on…
1. Reliance on Technology
and Capital Goods
Assembly line [roundabout production]
results in more efficient production
and more output.
Farmers are more efficient using capital goods
[plows & tractors] instead of their hands.
Roundabout
Production
1. Reliance on Technology
and Capital Goods
2. Specialization and Efficiency
Makes Use of Differences in Ability
[A slow person can fish & a fast person can be a hunter]
Fosters Learning by Doing
Saves Time
[when bilateral trade is not beneficial]
Texas Rangers
Three-way
Exchange
Crusoe
Has surplus fish
Wants coconuts
Friday
Saturday
Has surplus coconuts
Has surplus bananas
Wants fish
Wants bananas
52. Crusoe would get coconuts from (Friday/Saturday).
53. There (is/is no) coincidence of wants between any 2 states.
54. Money would flow (clockwise/counterclockwise).
55. The “coincidence of wants” problem means each transactor
(must/must not) have a product which the other wants.
1. Reliance on Technology
and Capital Goods
2. Specialization and Efficiency
Division of Labor
1. Reliance on Technology
and Capital Goods
2. Specialization and Efficiency
Geographic Specialization
Texas
Florida
Nebraska
1. Reliance on Technology
and Capital Goods
2. Specialization and Efficiency
3. Use of Money
As a Medium of Exchange
1. Reliance on Technology
and Capital Goods
2. Specialization and Efficiency
3. Use of Money
Money Eliminates Barter System Difficulties
GLOBAL PERSPECTIVE
Index of Economic Freedom, Selected Nations
FREE
MOSTLY
FREE
MOSTLY
UNFREE
REPRESSED
Hong Kong
New Zealand
United States
Belgium
Spain
France
Russia
Brazil
China
Cuba
Venezuela
North Korea
Source: Heritage Foundation & The Wall Street Journal
NS 50-51
50. The following is unique to capitalist ideology:
(use of money/ specialization/private ownership of property).
51. “Roundabout production” [assembly line] leads to:
(use of fewer capital goods/greater production).
The Three Basic Questions...
What, how, & for whom
1. What will be produced?
The Three Basic Questions...
1. What will be produced?
2. How will the goods be produced?
The Three Basic Questions...
1. What will be produced?
2. How will the goods be produced?
3. Who will get the goods & services?
Smith is saying that participants in the economy are motivated by
self-interest & that the “invisible hand” of the marketplace guides
this self-interest into promoting general economic well-being.
The Case for the Market System
Efficiency, Incentives, and Freedom
Adam Smith said the “invisible hand” determines what
gets produced, how, & for whom. It is the invisible hand
that moves us along the PPC. The invisible hand is now
called the market mechanism. Its essential feature is
the price signal.
Unlimited
Wants
WHAT G/S
to produce?
Choices
Limited
Resources
HOW will the
WHO will receive
G/S be produced? the G/S produced?
Most needy or most money
3 BASIC
ECONOMIC
QUESTIONS
Answers to the above determine:
ECONOMIC SYSTEMS
[Eskimo/pygmy]
TRADITIONAL
COMMAND
FREE MARKET
A. Traditional – “Custom rules”
B. Command – “Government rules”
C. Market – “Individuals rule”
D. Mixed
1.) Capitalism – modified free enterprise
2.) Communism
3.) Democratic Socialism
– the way society produces products
1. Traditional
2. Pure Command
3. Pure Market
4. Mixed
a. Capitalism
b. Democratic Socialism
c. Authoritarian Socialism [Communism]
The way the 3 basic questions are answered
Determines an economic system.
1. Traditional-[where “CUSTOM RULES”]
A. What, how, and for whom are answered by tradition
B. Change is resisted, no technology [clashes with tradition]
C. Heredity and caste system limit the economic role of individuals.
D. 35,000 Pygmies in the Ituri Forest are an example.
E. Men hunt & women/children gather/prepare food.
F. Wear loincloths from bark of fig trees [“PYGLER” or “PYBUGLE Boy”]
G. Eat mushrooms, berries, roasted grasshoppers, monkeys, & plantain
H. Eat bone marrow & everything else in an elephant.
I. Used to be “PYGACHE”, big Pygmies, have to wear “LARDACHE.”
• Economic activity is based on ritual, habit and custom.
Strengths
•
•
•
•
Everyone knows their role.
Little uncertainty over what to produce or how to produce.
The question of For Whom to produce is answered by custom.
Life is generally stable, predictable, and continuous.
Weaknesses
• Tends to discourage new ideas.
• Lack of progress leads to lower standard
of living.
• Government “rules”.
• Economic decisions are made at the top and the
people are expected to go along with choices their
leaders make.
Strengths
• Change direction drastically in a relatively
short time (The USSR went from an agrarian
to industrial nation in a very short time).
Weaknesses
•
•
•
•
•
Fidel Castro
Not designed to meet the wants and needs of individuals.
Lack of incentives to work hard leads to unexpected results.
Large bureaucracy for economic planning.
Not flexible in dealing with minor day to day problems.
People with new or unique ideas are stifled.
Karl Marx
• A mixed economy is one that uses both
market signals and government
directives to allocate goods & resources.
• Most economies use a combination of
market signals and government directives
to select economic outcomes.
• People and firms act in their own best interest
to answer economic questions.
• Markets allow buyers and sellers to come together
in order to exchange goods and services.
Strengths
•
•
•
•
•
•
Markets can adjust over time.
Freedom exists for everyone involved.
Adam Smith
Relatively small degree of governmental influence.
Decision making is decentralized.
Variety of goods and services are produced.
High degree of consumer satisfaction.
“Invisible” hand
Weaknesses
• The primary weakness is deciding for whom to
produce.
• The young, sick and old would have difficulty in
a pure market environment.
• Markets sometimes fail.
– Competition
(monopolies may develop)
– Resource mobility
(resources are sometimes hindered from moving about)
– Availability of information
(producers often have more information than do
consumers, which gives them an advantage)
• You are free to:
– Choose your job
– Choose where and when you work
– Work for yourself or someone else
– Leave your job and to move to another job
• Businesses are free to:
– Choose which workers they want
– Figure out how much business they want to do
The Circular Flow is an abstract,
oversimplified model, showing how
economic transactions [resources,
products (g/s), and money] take place.
1
2
Products
[goods/services]
1 a. Goods and services
2 b. Consumer expenditures
Businesses
3
4
4 c. Land, labor, cap., entrepreneur
3 d. Rent, wages, interest, & profits
Resources
[Land, labor, cap., ent.]
Householders
D
D
S
Resource Market
Product Market
1
2
S
Resources
[Land, labor, cap., ent.]
3 a. Goods and services
4 b. Consumer expenditures
Businesses
3
4
2 c. Land, labor, cap., entrepreneur
1 d. Rent, wages, interest, & profits
Products
[goods/services]
Householders
1
RESOURCE MARKET
2
Mechanic
4 A. Products [Goods/services] HOUSEHOLDS
3 B. Consumer expenditures
C. Land, Labor, Capital, Entrepreneur
D. Rent, Wages, Interest Profits
BUSINESSES
3
4
PRODUCT MARKET
RESOURCE MARKET
1
2
Mechanic
BUSINESSES
4
3
1
2
A. Products [Goods/services] HOUSEHOLDS
B. Consumer expenditures
C. Land, Labor, Capital, Entrepreneur
D. Rent, Wages, Interest Profits
3
4
PRODUCT MARKET
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
GDP
$ REVENUE
$ CONSUMPTION
$ COSTS
NET TAXES FLOW
TO GOVERNMENT
FROM BUSINESSES
$ INCOMES
GOVERNMENT
RESOURCE
GOODS & SERVICES
MARKET
FLOW TO BUSINESSES
RESOURCES
INPUTS
G/S
HOUSEHOLDS
BUSINESSES Taxes
GOVERNMENT
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
$ COSTS
$ INCOMES
NET TAXES FLOW
RESOURCETO GOVERNMENT
MARKETFROM HOUSEHOLDS
GOODS & SERVICES
FLOW TO HOUSEHOLDS
FROM GOVERNMENT
RESOURCES
INPUTS
G/S
National Defense
BUSINESSES
Taxes
GOVERNMENT
GOODS &
SERVICES
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
L,L,C,E
BUSINESSES
INPUTS
HOUSEHOLDS
GOVERNMENT
GOODS &
SERVICES
EXPENDITURES
FLOW TO
ACQUIRE RESOURCES
$ REVENUE
GOODS
&
RESOURCES
SERVICES
FLOW TO
GOVERNMENT
PRODUCT
MARKET
$ CONSUMPTION
GOVERNMENT
$ COSTS
EXPENDITURES
FLOW TO
PRODUCT MARKET
$ INCOMES
GOODS & SERVICES
FLOW TO
RESOURCE
GOVERNMENT
MARKET
RESOURCES
INPUTS
GOVERNMENT
BUSINESSES
GOODS &
SERVICES
HOUSEHOLDS
B-2 Bombers
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
NS 56-59
Fuzzy Wuzzy
56. In the product market (householders/businesses) are the
demanders and (householders/businesses) are the suppliers.
57. In the resource market (householders/businesses) are the
demanders and (householders/businesses) are the suppliers.
58. In the resource market, (householders/businesses)
sell resources to (householders/businesses).
59. In the product market, (householders/businesses) sell
products [goods/services] to (householders/businesses).