Transcript Chapter 2: Economic Systems

Essential Question: How does a society
decide who gets what goods and services
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Remember the fundamental economic problem?
________________!
As a result of scarcity, every society has to
decide:
What __________________should be produced?
__________ should goods & services be produced?
Who ________________ these goods and services?
◦ What to produce?
◦ How to produce it?
◦ Who gets it?
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Remember our production possibilities examples
What’s the best use of the country’s resources?
◦ Should we use land for farming or parks or mining coal?
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Is there enough ______________ to make the good
or service?
◦ Is our workforce well educated enough to make it?
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What’s the _______________ of the choices the
country makes?
◦ Are we in debt to other countries because we have to
buy things we can’t make ourselves?
◦ Nuclear power may be cheaper but maybe not safer
◦ Should the government provide an education to children
or let parents pay for it if they want to send their
children to school?
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Who can afford a new car?
Who has to use public transportation?
Who can afford to go to college?
How much should we pay the owners of the
factors of production?
◦ Should farmers get paid more than factory owners?
◦ Why do doctors make more money than teachers?
◦ Why are education and health care provided by the
government in some countries and things you have
to pay for yourself in others?
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Societies answer the 3 basic
economic questions in different
ways
This is based on the difference
in value they place on different
economic goals:
Efficiency (are we best using
resources?)
Freedom (can people choose for
themselves?)
Security (is there a safety net?)
Equity (is there a big gap
between the rich & poor?)
Growth (is the economy
growing? Too fast or too slowly?
Is unemployment too high?
5 Economic Goals
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Economic Goals
Which is more
important? Who decides?
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An economy is
efficient if it can
deliver the right
goods in the right
quantity to the right
people at the right
price.
If the economy is
inefficient, you might
get shortages or a
surplus
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Can people buy the products they have the
money to pay for?
Can people work where they want to?
Can people own homes?
Can people start businesses if they want to?
How hard or easy is it to do these things?
Index of Economic Freedom
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Is there a social safety
net?
What happens if you lose
your job?
What happens if you
can’t pay for a place to
live?
What if you are too sick
or hurt or old to work?
Is the value of money
stable?
Will stores run out of
food? Hospitals out of
medicine & supplies?
Economic Security Index
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Is there a big income
gap in the society?
Are all workers valued
equally? Or is there
racial or gender or age
discrimination?
How are goods &
services divided up?
Should you get more if
you can pay for more?
If you produce more?
What about people who
are unable or unwilling
to produce in the
economy?
US equity issues
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As the population
grows and changes,
the economy needs
to add jobs (and
consumers)
More growth means
more income
This increases the
standard of living
(economic
prosperity)
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Rapid growth is not
always a good thing
Think about the
problems during
America’s Industrial
Revolution
Rapid growth can
lead to inflation
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Is it possible to
achieve all of these
economic goals?
Are some of them
mutually exclusive
(if have one, can’t
have the other)
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If we have a social
safety net, taxes
will be higher. Will
that slow economic
growth?
If we build more
factories to achieve
economic growth,
will that harm the
environment?
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This is why there are different types of economic
systems; societies (and their governments have:
1. answered the three basic economic questions
in different ways
2. prioritized the society’s economic goals
differently
What are the different types of economic
systems? (4)
1.
2.
3.
4.
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Decisions are made based on ________ and
what has been done in the past
Very little __________________________
Often revolves on the family unit and
extended family
Focus on ________________; meeting the basic
needs of the society
Tend to be isolated
Few modern conveniences, little access to
technology
Relatively low standard of living (by our
standards)
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What are some examples?
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What is a market?
What do all of the
following have in
common?
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Americans value
economic _______
very highly, but
not all countries
place the same
value on it,
preferring
instead to have a
stronger social
safety net or
more economic
equity.
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There has never been
a ________ market
economy
We do have some
government
regulation
Ex. For health and
safety reasons
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Bring _______ &
_______ together
People can
_________
Don’t have to be
self-sufficient
This is the best use
of scarce resources
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Specialization is
___________________
because it is easier
and avoids waste of
resources
People can focus on
fewer skills
Capital and land,
etc. can be used for
a single purpose
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The 3 basic economic
questions are
answered through
__________________ in
the market (where
buyers & sellers come
together)
What to produce?
How to produce it?
Who gets it?
How does this
process work? Let’s
look at a model of a
market economy…
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_________________ and ___________
Households own the factors of production: land,
labor, capital and entrepreneurship (AKA inputs)
_______________ uses the factors of production
into goods & services (AKA output)
There are two directions to the flow
◦ One for ______________ (payments)
◦ One for ______________ & _____________ (physical flow)
◦ Government plays a role in the circular flow model also,
but more about that in section 4.
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Economists assume a few key things about a
free market:
1. that a free market is ____________________
The economy is made up of millions of
decisions made by _________ and __________
2. Guided by self-________ (not selfishness)
3. Creates competition because people are
acting out of self-interest to get the best deal
(pay a lower price or get a better-paying job)
4. Self-interest motivates people to act but
__________________ regulates the market.
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No!
Looking out for your own
personal gain, not looking
to take advantage of others
Idea comes from
_____________________
◦ Scottish philosopher
◦ Wrote ___________________ in
1776
◦ Used the metaphor of
____________________________
to explain how self-interest and
competition work together to
regulate the market
◦ No one tells people what to
make or how much to make
or how much to charge for a
product.
◦ The market decides these
things for itself!
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“Give me that which I want, and you shall
have this which you want…it is in this manner
that we obtain from one another the far
greater part of those good (services) which
we stand in need of. 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.”
◦ -Adam Smith in the Wealth of Nations
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1. Economic ____________________
◦ Producers only make what people want to buy.
Prices can adjust quickly
2. Economic _______________________
People can work where they want and businesses can
make and sell what they want
3. Economic ___________________
Since there’s competition, businesses are always
innovating, which creates growth
4. Additional goals
Consumer sovereignty
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_______________, not
consumers and
producers answers
the 3 basic economic
questions
Government owns
the
____________________
They own the land,
the factories, decide
how much workers
get paid, etc.
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Socialism is a range of different
___________ and
___________systems
◦ Socialist countries aren’t all the
same
◦ Socialism and Communism ARE
NOT THE SAME!
◦ Have prioritized different economic
goals than in capitalist countries
◦ Economic equity is more important
and many countries think they can
better achieve this goal through
central planning done by the
government
◦ In some socialist countries,
there is a lot of economic
freedom, but the government
plays a larger role in
redistributing wealth through
taxes and providing
government services such as
child care and health care.
◦ In other socialist countries,
there’s more of a focus on
the government owning the
means of production
◦ The Scandinavian countries
(Norway, Denmark, Sweden,
Finland) are good examples
of socialist countries
◦ China, Laos, Myanmar
(Burma), Cuba are good
examples of centrally planned
(communist) countries
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Developed in Europe in the 1800s in response to
the Industrial Revolution
Based on the writings of __________________, who
wrote the Communist Manifesto
Marx viewed capitalism as _________________
Thought all of human history was a battle
between the ______________ (bourgeoisie) and the
_______________ (proletariat)
Communism depends competition to drive wages
down, so workers will always be exploited
Owners get rich off the work of the proletariat,
but don’t share the wealth with them
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_____________ underwent a
communist revolution in
1917 (the Bolshevik
Revolution)
Was communist until the
collapse of the Soviet Union
in ________________.
Operated the economy
based on
__________________
Often had severe __________
Consumer goods were
usually of poor quality
Government planning
favored the military and
heavy industry
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__________ had its
revolution in 1949 and was
is still considered a
communist country
The economy was run
through central planning
by the government until the
late 1970s
Has begun some free
market reforms
Can this work long term?
Can you have an
authoritarian government
and capitalism?
if people have economic
freedom, will they want
political freedom?
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1. Economic efficiency
◦ Decisions made by a huge bureaucracy can be
inefficient—can get waste and fraud.
◦ Slow to respond to changing economic conditions
◦ Can’t quickly respond to consumer preferences
◦ 2. Economic Freedom
 Command economies prioritize economic equity over
freedom, even if this means violence, as in the USSR
and China
 No competition since the government owns everything
 Producers and consumers have no choices
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No country in the
world today has a
pure market
economy or a pure
command economy
All countries are
somewhere along
the spectrum of
mixed economies
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Adam Smith and other early economists
advocated a ______________________ approach
The role of government has changed
The ______________________ couldn’t
efficiently meet the needs of individuals or
would conflict with other societal goals
◦ Education
◦ National defense
◦ Infrastructure like roads & bridges & Internet
networks
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Governments are also needed to protect
_______________________ (what would Locke
say about this?)
Governments make sure markets run well by
keeping things ______________
◦ Access to accurate information
◦ Preventing monopolies & price fixing
◦ Protecting public health & safety
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Government
purchases goods
and services
Pays government
employees
Buys equipment for
the armed forces
Builds roads and
schools, etc.