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Economic Systems

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Title: Economic Systems


1
Chapter 2
  • Economic Systems

2
Chapter 2 Economic Systems
  • Scarcity and Decision Making
  • How societies have developed different economic
    systems to make choices about resource allocation

3
Chapter 2 Economic Systems
  • Answering the Three Economic Questions
  • The Free Market
  • Centrally Planned Economies
  • Modern Economies

4
Section 1 Answering Three Economic Questions
  • Scarcity forces societies and nations to answer
    key economic questions
  • Different economic systems have evolved in
    response to the problem of scarcity
  • Economic system
  • The method used by a society to produce and
    distribute goods and services

5
Section 1 Answering Three Economic Questions
  • Because economic resources are limited, every
    society and nation must answer
    three key economic questions
  • 1) What goods and services should be produced?
  • 2) How should these goods and services be
    produced?
  • 3) Who consumes these goods and services?

6
Section 1 Answering Three Economic Questions
  • What goods and services should be produced?
  • How much resources will be devoted to
  • National defense
  • Education
  • Public health and welfare
  • Consumer goods

7
Section 1 Answering Three Economic Questions
  • How should goods and services be produced?
  • How should resources be used?
  • Land
  • Labor
  • Capital

8
Section 1 Answering Three Economic Questions
  • Who consumes goods and services?
  • Societies must decide how to distribute the
    available goods and services
  • Determined by how societies choose to distribute
    income
  • based on social values and goals
  • Factor payments
  • The income people receive for supplying factors
    of production
  • land, labor, capital
  • entrepreneurship

9
Section 1 Answering Three Economic Questions
Societies answer the three economic questions
based on their values.
Economic Goals






Making the most of resources
Economic efficiency
Economic freedom
Freedom from government intervention in the
production and distribution of goods and
services
Economic security and predictability
Assurance that goods and services will be
available, payments will be made on time, and a
safety net will protect individuals in times of
economic disaster
Economic equity
Fair distribution of wealth
Economic growth and innovation
Innovation leads to economic growth, and
economic growth leads to a higher standard of
living
Other goals
Societies pursue additional goals, such as
environmental protection
10
Section 1 Answering Three Economic Questions
  • Safety net
  • Government programs that protect people
    experiencing unfavorable economic conditions
  • Injuries
  • Layoffs and unemployed
  • Natural disasters
  • Severe shortages
  • Retirement
  • Poor

11
Section 1 Answering Three Economic Questions
  • Standard of living
  • Level of economic prosperity
  • A nations economy must grow to improve its
    standard of living
  • Especially if its population is growing
  • New jobs and income need to be provided
  • Innovation plays huge role

12
Section 1 Answering Three Economic Questions
  • Four main kinds of economic systems based
    on
  • Prioritization of economic goals
  • Values of the society or nation

13
Section 1 Answering Three Economic Questions
  • Four main kinds of economic systems
  • Traditional Economy
  • Market Economy
  • Command Economy
  • Mixed Economy

14
Four Economic Systems
Section 1 Answering Three Economic Questions
An economic system is the method used by a
society to produce and distribute goods and
services.
1) Traditional economies rely on habit,
custom, or ritual to decide what to produce, how
to produce it, and to whom to distribute it
(consumption). 3) In a centrally planned economy
the central government makes all decisions about
the production and consumption of goods and
services. Sometimes called Command economies
2) In a Market economy economic decisions
(production and consumption) are made by
individuals and are based on voluntary exchange,
or trade. Also called free markets, or
capitalism. 4) Mixed economies are
systems that combine tradition and the free
market with limited government intervention.
15
Chapter 2 Economic Systems
  • Section 1 Review
  • Answering Three Economic Questions

16
Chapter 2, Section 1 Review
  • 1. Each society determines who will consume what
    is produced based on
  • (a) its unique combination of social values and
    goals.
  • (b) the amount of factor payments.
  • (c) its needs and wants.
  • (d) economic equity.

17
Chapter 2, Section 1 Review
  • 2. To improve its standard of living, a nations
    economy must
  • (a) remain stable.
  • (b) grow through innovation.
  • (c) reach economic equity.
  • (d) allow the central government to make economic
    decisions.

18
Chapter 2 Economic Systems
  • Section 1 Review
  • Answering Three Economic Questions
  • Assignments
  • Textbook pg. 24, Figure 2.1
  • Identify the opportunity costs of each method of
    farming
  • Chapter 2, Section 1 - Review

19
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20
Chapter 2 Economic Systems
  • Answering the Three Economic Questions
  • The Free Market
  • Centrally Planned Economies
  • Modern Economies

21
Section 2 The Free Market
  • Market
  • An arrangement that allows buyers and sellers to
    exchange things
  • Markets exist because none of us produces all we
    require to satisfy our needs and wants
  • Markets allow us to exchange the things we have
    for the things we want

22
Section 2 The Free Market
  • Specialization
  • The concentration of the productive efforts of
    individuals and firms on a limited number of
    activities
  • Specialization leads to efficient use of resources

23
Free Market Economy (voluntary exchanges)
Product market
  • In a free market economy, households and
    business firms use markets to exchange money and
    products.
  • Households own the factors of production and
    consume goods and services.

Households supply firms with land, labor, and
capital
Firms pay households for land, labor, and capital.
Factor market
24
Section 2 The Free Market
  • Household
  • A person or group of people living in the same
    residence
  • Households own factors of production
    (land, labor, capital)
  • Households are the consumers of goods and services

25
Section 2 The Free Market
  • Firm (or business)
  • An organization that uses resources to produce a
    product, which it then sells
  • Firms transform inputs (factors of production)
    into outputs (products)

26
Section 2 The Free Market
  • Factor market
  • Market in which firms purchase the factors of
    production from households
  • Product market
  • Market in which households purchase goods and
    services that firms produce
  • Profit
  • The financial gain made in a transaction

27
Section 2 The Free Market
  • Our society is competitive
  • Competition and self-interest keep the
    marketplace functioning
  • Competition
  • The struggle among producers for the dollars of
    consumers
  • Regulating force in the free market
  • Self-interest
  • Ones own personal gain
  • Motivating force in the free market

28
Section 2 The Free Market
  • Incentive
  • An expectation that encourages people to behave
    in a certain way
  • The hope of reward or the fear of punishment
  • Consumers have incentive to look for lower prices
  • Firms have incentive to make greater profits by
    increasing sales

29
Section 2 The Free Market
  • Two forms of incentives
  • Monetary
  • Rewards (profits or savings) in the form of money
  • Nonmonetary
  • Rewards in forms other than money
  • Gifts, services, other goods

30
Section 2 The Free Market
  • Invisible hand
  • Term economists use to describe the
    self-regulating nature of the marketplace.
  • Competition causes more production and moderates
    prices
  • Consumers get products they want at prices that
    closely reflect the cost of producing them

31
Section 2 The Free Market
  • Advantages of the free market
  • 1. Economic efficiency
  • Because it is self-regulating, a free market
    responds efficiently to rapidly changing
    conditions
  • 2. Economic freedom
  • Highest degree of economic freedom of any system
  • Workers free to work where they want
  • Firms free to produce what they want
  • Individuals free to consume what they want

32
Section 2 The Free Market
  • Advantages of the free market
  • 3. Economic growth
  • Competition encourages innovation
  • Entrepreneurs always seeking profitable
    opportunities, contributing new ideas and
    innovations
  • 4. Additional goals
  • Free markets offer wider variety of goods and
    services than any other system, because producers
    have incentives to meet consumers desires this
    is called consumer sovereignty

33
Section 2 The Free Market
  • Consumer sovereignty
  • The power of consumers to decide what gets
    produced

34
Chapter 2 Economic Systems
  • Section 2 Review
  • The Free Market

35
Chapter 2, Section 2 Review
  • 1. Why do people need to buy and sell goods or
    services?
  • (a) People need to buy and sell goods to make a
    profit.
  • (b) People buy and sell to maintain a competitive
    society.
  • (c) No one is self-sufficient.
  • (d) People need to provide the market with goods
    and services.

36
Chapter 2, Section 2 Review
  • 2. What factors create the phenomenon of the
    invisible hand?
  • (a) incentives and efficiency
  • (b) specialization and efficiency
  • (c) competition between firms
  • (d) competition and self-interest

37
Chapter 2, Section 2 Review
  • 3. Which of the following is an accurate
    definition of competition?
  • (a) the hope of reward that encourages a person
    to behave in a certain way
  • (b) the struggle among producers for the dollars
    of consumers
  • (c) the financial gain made in a transaction
  • (d) an organization that uses resources to
    produce a product

38
Chapter 2 Economic Systems
  • Section 2 Review
  • The Free Market
  • Assignments
  • Chapter 2, Section 2 - Review

39
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40
Chapter 2 Economic Systems
  • Answering the Three Economic Questions
  • The Free Market
  • Centrally Planned Economies
  • Modern Economies

41
Section 3 Centrally Planned Economies
  • In a centrally planned economy the central
    government makes all decisions about the
    production and consumption of goods and services.
  • Sometimes called Command economies

42
Section 3 Centrally Planned Economies
  • Operate in direct contrast to free market systems
  • Oppose private property, free market pricing,
    competition, and consumer choice
  • A central bureaucracy makes all decisions about
    what goods to produce, how to produce them, and
    who gets them (consumes)

43
Section 3 Centrally Planned Economies
  • Organization of Centrally Planned Economies

In a centrally planned economy, the government
owns both land and capital. The government
decides what to produce, how much to produce,
and how much to charge. Government controls
where individuals work and what wages they
are paid.
44
Section 3 Centrally Planned Economies (Command
Economies)
  • Socialism
  • A social and political philosophy based on the
    belief that democratic means should be used to
    distribute wealth evenly throughout a society.
  • Communism
  • A political system characterized by a centrally
    planned economy with all economic and political
    power resting in the hands of the central
    government.

45
Section 3 Centrally Planned Economies (Command
Economies)
  • Socialist economies can be democracies
  • Communist governments are authoritarian
  • Require strict obedience to an authority, such as
    a dictator
  • Do not allow individuals freedom of judgment or
    action

46
The Former Soviet Union (case study)
  • Communist nation arose out of two revolutions in
    1917.
  • Soviet planners were most concerned with building
    national power and prestige in the international
    community
  • Best land, labor, and capital was allocated to
    the armed forces, space program, and production
    of capital goods such as farm equipment and
    factories.

47
The Former Soviet Union (case study)
  • Soviet Agriculture
  • In the Soviet Union, the government created large
    state-owned farms and collectives for most of the
    countrys agricultural production.
  • Soviet Industry
  • Soviet planners favored heavy-industry production
    (such as chemical, steel, and machinery), over
    the production of consumer goods.
  • Soviet Consumers
  • Consumer goods in the Soviet Union were scarce
    and usually of poor quality.

48
Section 3 Centrally Planned Economies (Command
Economies)
  • Collective
  • Large farm leased from the state to groups of
    peasant farmers
  • Farmers managed operation, but were told by
    government what to produce
  • Farmers received either a share of what they
    produced or income from its sale

49
Section 3 Centrally Planned Economies (Command
Economies)
  • Heavy industry
  • Industry that requires a large capital investment
    and that produces items used in other industries
  • Chemical, steel, heavy machinery manufacturing

50
The Former Soviet Union (case study)
  • Soviet industry
  • Lack of incentives
  • Jobs were guaranteed wages were set by
    government
  • Once a production quota was met, no reason to
    produce more
  • Little incentive to work hard or to innovate
  • Illegal for workers to exhibit entrepreneurial
    behavior and start their own businesses

51
Problems of a Centrally Planned Economy
  • Centrally planned economies face problems
    of poor-quality goods, shortages,
    and diminishing production.

52
Section 3 Centrally Planned Economies
  • Advantages
  • Work quickly to accomplish specific goals
  • Can be used to jumpstart selected industries
  • Guarantee jobs and income

53
Section 3 Centrally Planned Economies
  • Poor quality of goods
  • Serious shortages of non-priority goods and
    services
  • Diminishing production
  • Large, expensive bureaucracy
  • Decisions overly complicated
  • Lacks flexibility to adjust to consumer demands
  • Individual freedoms sacrificed to pursue societal
    goals
  • Most planned economies have failed

54
Chapter 2 Economic Systems
  • Section 3 Review
  • Centrally Planned Economies
  • (Command Economies)

55
Chapter 2, Section 2 Review
  • 1. In a socialist country,
  • (a) central planning is unnecessary.
  • (b) the government often owns major industries,
    such as utilities.
  • (c) an authoritarian government controls the
    economy.
  • (d) economic equality is not important.

56
Chapter 2, Section 2 Review
  • 2. Which of the following is an advantage of a
    centrally planned economy?
  • (a) the systems bureaucracies are small and
    flexible
  • (b) the system can work quickly to accomplish
    specific goals
  • (c) innovation is well rewarded
  • (d) consumers needs are well met

57
Chapter 2, Section 2 Review
  • 3. Which of the following is NOT a reason why
    Soviet workers lacked incentives?
  • (a) Job were guaranteed.
  • (b) Wages were set by the government.
  • (c) There were no production quotas.
  • (d) Entrepreneurial behavior was illegal.

58
Chapter 2 Economic Systems
  • Section 3 Review
  • Centrally Planned Economies
  • (Command Economies)
  • Assignments
  • Pg. 17 of Unit 1 book, Soviet Union

59
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60
Chapter 2 Economic Systems
  • Answering the Three Economic Questions
  • The Free Market
  • Centrally Planned Economies
  • Modern Economies

61
Section 4 Modern Economies
  • Limits of laissez faire
  • The doctrine that states that government
    generally should not intervene in the marketplace
  • Adam Smith
  • Wrote The Wealth of Nations
  • Published in 1776
  • Called for restricting the role of the government
    in the economy

62
Section 4 Modern Economies
  • As market economies have evolved, government
    intervention has increased
  • Most modern economics are a mixture of economic
    systems
  • Blending the market with government involvement
    (or intervention)
  • Rise of Mixed economies
  • Systems that combine tradition and the free
    market with limited government intervention

63
Section 4 Modern Economies
  • Some government interventions
  • National defense
  • Roads, highway systems, mass transit
  • Conservation
  • Environmental protection
  • Job safety guidelines
  • Consumer protection

64
Section 4 Modern Economies
  • Some government interventions
  • Social Security
  • Minimum wage
  • Unemployment benefits
  • Education
  • Health care

65
Section 4 Modern Economies
  • More government interventions
  • Laws
  • Protecting property rights
  • Patent laws give the inventor of a new product
    the exclusive right to sell it for a certain time
    period
  • Private property
  • Property owned by individuals or companies, not
    by the government or the people as a whole

66
Section 4 Modern Economies
  • More government interventions
  • Laws
  • Enforcing contracts
  • Insisting on competition
  • Monopolies trusts are illegal

67
Section 4 Modern Economies
  • Mixed economies balance economic control and
    freedom in the market
  • Prioritize economic goals (based on societys
    values)
  • Some goals are better met by open market
  • Some goals are better met by government action
  • Evaluate opportunity cost of pursuing each goal
  • What are you willing to give up?

68
Section 4 The Rise of Mixed Economies
  • Market economies, with all their advantages, have
    certain drawbacks.

69
Section 4 Modern Economies
  • Example Sweden
  • See textbook p. 41 Global Connections
    Swedens Mixed Economy
  • Swedish government redistributes more than half
    of the nations wealth through social benefit
    programs
  • Swedes pay around 56 of their GDP in taxes,
    compared to Americans paying 32
  • Gross Domestic Product (GDP)
  • Dollar value of all goods and services produced
    within a countrys borders within a given year

70
Governments Role in a Mixed Economy
  • In a mixed economy,
  • The government purchases land, labor, and capital
    from households in the factor market
  • The government purchases goods and services in
    the product market.

Product market
Factor market
71
Section 4 Comparing Mixed Economies
  • Foundation of the U.S. economy is the
    free market
  • Free enterprise
  • An economic system characterized by private or
    corporate ownership of capital goods
  • Investments are determined in a free market by
    private decision rather than by state control

72
Section 4 Comparing Mixed Economies
  • An economic system that permits the conduct of
    business with minimal government intervention is
    called free enterprise. The degree of government
    involvement in the economy varies among nations.
  • Continuum
  • A range with no clear divisions

73
Section 4 Comparing Mixed Economies
  • In free enterprises, the degree of government
    involvement in the economy varies among nations.
  • Continuum
  • A range with no clear divisions

74
Section 4 Comparing Mixed Economies
  • Mixed economies where government intervention
    dominates
  • North Korea
  • economy is almost totally dominated by the
    government
  • government owns all property economic output
  • state-owned industries produce 95 of nations
    goods
  • almost all imports are banned
  • production of goods services by foreign
    companies is forbidden

75
Section 4 Comparing Mixed Economies
  • Mixed economies where government intervention
    dominates
  • China
  • economy is dominated by government, but 25 of
    all enterprises are at least partly owned by
    individuals
  • has relied heavily on central planning in the
    past, but is now in transition

76
Section 4 Comparing Mixed Economies
  • Transition
  • A period of change in which an economy moves away
    from a centrally planned economy toward a
    market-based system
  • To make the transition, state firms must be
    privatized

77
Section 4 Comparing Mixed Economies
  • Privatize
  • To sell state-run firms to individuals
  • These firms then compete with one another in the
    marketplace

78
Section 4 Comparing Mixed Economies
  • Mixed economies where the market system dominates
  • Hong Kong
  • private sector rules
  • government protects private property
  • government rarely interferes with free market
  • Government does set wage and price controls on
    rent and some public services
  • highly receptive to foreign investment
  • virtually no barriers on foreign trade
  • banks operate independently of government
  • foreign-owned banks have nearly same rights as
    domestic ones

79
Section 4 Comparing Mixed Economies
  • United States economy
  • free enterprise
  • foreign investment encouraged
  • free trade
  • government does protect some domestic industries
    retaliates against trade restrictions imposed
    by other nations
  • few restrictions on banking industry
  • high level of economic freedom
  • low level of government regulation

80
Section 4 Comparing Mixed Economies
  • United States economy
  • Government interventions
  • keep order
  • provide vital services
  • promote general welfare

81
Chapter 2, Section 4 Review
  • The United States economy is a mixed economy
  • (a) based on the principle of a traditional
    economy, but allows some government intervention.
  • (b) based on the principles of a centrally
    planned economy, with limited government
    intervention.
  • (c) based on the principles of the free market,
    and allows no government intervention.
  • (d) based on the principles of the free market,
    but allows some government intervention.

82
Chapter 2, Section 4 Review
  • Government intervention in a modern economy is
    useful because
  • (a) the needs and wants of modern society are
    always met by the marketplace.
  • (b) the marketplace has many incentives to create
    public goods such as parks and libraries.
  • (c) governments are able to provide some goods
    and services that the marketplace has no
    incentive to produce.
  • (d) the marketplace provides all of its own laws.

83
Chapter 2 Economic Systems
  • Section 4 Review
  • Modern Economies
  • Assignments (handouts)
  • Vocabulary Practice
  • Economic Cartoons
  • Building Flowcharts
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