Explorations in Economics
Alan B. Krueger & David A. Anderson
Chapter 2: Comparing Economic Systems
- Module 4: Using Resources to Achieve Economic Goals
- Module 5: Types of Economic Systems
- Module 6: The Modern Market Economy
MODULE 4:
Using Resources to Achieve
Economic Goals
KEY IDEA:
Every society must determine how to use its resources to
achieve its economic goals.
OBJECTIVES:
• To explain the three basic economic questions.
• To identify five economic goals that societies pursue.
• To describe tradeoffs made among the five goals.
THE THREE BASIC
ECONOMIC QUESTIONS
1. What should be produced?
2. How should it be produced?
3. For whom should it be produced?
What should be produced?
• Resources are limited. TRADEOFF If more of some
goods are produced, less of others must be
produced.
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How should it be Produced?
• Requires choosing which combination of resources to
use in the production of each good and service.
• Example: assemble parts by hand, or use industrial
robots. There is more than one way to produce and
different ways to use different combination of
resources.
• if a method wastes resources, production is
inefficient.
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For Whom Should It Be Produced?
• Should some people get two pairs of jeans while
others have none?
• Because people don’t agree about what is fair and
what is best, the “For whom?” question creates
frequent and heated public debates.
• Is the distribution of goods efficient or fair?
• Healthcare
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SOCIETY’S ECONOMIC GOALS
The standard of living is
a measure of comfort in
terms of the goods and
services available.
Economic Goals:
• Economic Growth
• Efficiency
• Equity
• Economic Security
• Economic Freedom
Equality
• the quality of being just and fair
• Equality of Opportunity: They believe that everyone
in a society should have the same opportunities in
life.
• The idea that is that if there are equal opportunities
for quality education and jobs and yet people end up
with unequal outcomes, it is the fair and just result of
the choices individuals make.
Economic Security
• a social safety net, which can be any form of
government assistance for those with financial needs
• Unemployment insurance, workers’ compensation
(victims of work related injuries), social security
(retired and disabled), and supplemental nutrition
assistance (to put food on the table of low-income
households)
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Economic Freedom
• The benefits from making the best choices are lost
when people are not free to make those choices.
• Economists see cash as a great gift, because the
recipient can choose whatever he or she wants to
buy with it.
• Economic Freedom: people can make economic
decisions for themselves. People prefer to live in a
country where they are free to choose where to live,
what goods and services to buy, and what type of
work to perform.
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Sustainability
• Which is the ability to continue actions indefinitely.
• A society with a pleasing level of production would at least like
to sustain that production and the standard of living it
supports.
• Current production levels are unsustainable if they are being
used up faster than they become available. For instance, if
farmers overwork their land, nitrogen and other nutrients in
the soil are depleted, and crop production falls.
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TRADEOFFS AMONG GOALS
Tradeoffs force societies to prioritize among
economic goals.
When the gains from change exceed the losses, it is
possible to achieve an improved standard of living
without neglecting the goals of equity and
economic security.
MODULE 4 REVIEW
What is…
A. Standard of living?
B. Equity?
C. Efficiency?
D. Economic security?
E. Social safety net?
F. Economic freedom?
J. Economic growth?
MODULE 5:
Types of Economic Systems
KEY IDEA:
A country’s economic system determines how well it can
achieve each economic goal.
OBJECTIVES:
•To explain what an economic system is and how incentives
play a role.
•To describe the features of a traditional economy, a
command economy, a market economy, and a mixed
economy.
ECONOMIC SYSTEMS AND INCENTIVES
An economic system
is an organizational
structure for
addressing what, how,
and for whom to
produce.
An incentive is the
prospect of a reward or
punishment that
influences a decision or
motivates greater effort.
TRADITIONAL ECONOMIES
In a traditional economy, decisions about resources are
made by habit, custom, superstition, or religious
tradition.
COMMAND ECONOMIES
In a command economy, central planners make the important
decisions about what, how, and for whom to produce.
Communism is a political- economic system under which all
resources and businesses are publicly owned and economic
decisions are made by central authorities.
Socialism is an economic system under which most resources
and businesses are publicly owned and economic decisions are
made by groups of workers and consumers.
MARKET ECONOMIES
In a market economy, most key economic decisions are made by
business owners and consumers.
In a capitalist system, most resources and businesses are
privately owned.
A free- enterprise system is an economic system based on
private(individual or business) ownership of resources and
voluntary exchange.
MIXED ECONOMIES
A mixed economy combines a market economy
with significant government involvement and
elements of tradition.
Governments in market economies have
expanded their roles in the pursuit of equity,
economic security, and sustainability.
Traditional Economies:
• Three Economic Questions: “We do it the way we’ve
always done it. “ “What has always been produced”
“The same way we’ve always produced it.” “ For the
people who have received our products in the past.”
• Decisions require very little planning, and people in
traditional economies just do what is expected,
which is the same as what has always been expected.
• Part of Africa, or in traditional agricultural villages, or
the Amish
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Traditional Economies
• the incentives include social approval for performing
well at a traditional role and disapproval for rebelling
against traditions or performing poorly.
• Exposure to outsiders is often limited, much behavior
is determined by established patterns.
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Traditional Economy: Advantages
• Tend to provide economic security
• Sustainable economy because they tend to grow very
slowly
• Can achieve a relative equitable distribution of goods
and services
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Traditional Economies:
Disadvantages
• Rarely achieve the goals of economic freedom, economic
growth, and a high standard of living. Equity can also be a
problem if the standards of the community are unfavorable to
certain groups, such as women.
• Some societies resist the adoption of new technology, such as
electricity or the internet that contribute to education, health,
and comfort.
• Your freedom would be limited because your future is
predetermined based on your family or the judgment of the
village elders.
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COMMAND ECONOMY
• In each type of command economy, key resources
and businesses are owned by groups of workers or by
the government, rather than by private individuals
• Tight control over economic decisions and activities.
Central planners assign production quotas for
factories.
• China, North Korea, Cuba
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Incentives in a Command Economy
• Incentives in a command economy come from the
government.
• Rewards and punishments are given to the managers
of factories, transportation systems, schools and
other key enterprises.
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Command Economies: Advantages
• Provide economic security, central planners
guarantee employment by assigning every person to
a job that is part of the plan.
• Basic needs, such as housing, education, and medical
care are provided by the government without charge.
• Command economies have the ability to adjust
rapidly to changing circumstances. It can shift
resources away from other types of production into
industries of computers, bridges, or missiles quickly.
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Command Economy: Disadvantages
• Economic freedom is sacrificed to ensure that every part of the central
plan is obeyed. People cannot start a business or change jobs in a
command economy without government permission, if at all.
• The standard of living in command economies is low despite the
abundance of jobs. Since those who run the businesses don't get to keep
the money they earn, there are few incentives to work hard, to innovate,
or to use resources efficiently. Leading to weak economic growth.
• Consumers face a shortage of consumer goods and the government must
resort to rationing.
• Fail to achieve acceptable levels of equity. High officials, top bureaucrats,
and military officers typically fare better in a command system.
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Market Economies
• Market economy: most key economic decisions are
made by business owners and consumers.
• Business owners are free to produce and how to
produce it, and business sell their products to
whoever chooses to buy them.
• The United States is a primary example of a market
economy. Along with Canada, England, France,
Germany, Japan, and Singapore.
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Incentives in a Market Economy:
• Gains and losses that follow from the economic
choices of business owners and consumers.
• Any exchange in a market economy must benefit
both sides or it wouldn't be carried out voluntarily.
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Market Economy: Advantages
• The availability of desirable goods is one reason market economies create
higher living standards
• Efficient production methods are another reason for high living standards
in market economies.
• Market economies tend to have rapid economic growth, largely because
they encourage discovery and innovation.
• Market economy allows more economic freedom for consumers and
businesses than traditional or command economies. People are free to
make their own choice about where to work and what to buy with the
money they earn and businesses can decide what to produce and how to
produce it.
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Market Economies: Disadvantages
• Equity: There is no central plans or strong traditions to ensure everyone
has a job.
• Resource conservation is another challenge. When individuals decide how
to use resources, they may overlook the effects of their decisions on the
environment and on future generations.
• Finally, the powerful incentives in market economies can lead to behavior
that goes against society’s goals. Example: drug companies to rush new
medications to the market without adequate testing.
• To avoid problems such as these, governments can intervene with laws for
the protection of society Mixed Economy
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Mixed Economy
• Combines a market economy with significant
government involvement and elements of tradition.
• All modern economies are mixed economies.
Example: in the U.S. government agencies make key
decision about public services including national
defense, education, and police protection. Also,
government regulates activities that could present
harm to society if left unchecked,
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ECONOMIC SYSTEMS
MODULE 5 REVIEW
What is…
A. Economic system?
B. Traditional economy?
C. Incentive?
D. Command economy?
E. Communism?
F. Socialism?
G. Rationing?
H. Market economy?
I. Capitalist system?
J. Free- enterprise system?
K. Mixed economy?
MODULE 6:
The Modern Market Economy
KEY IDEA:
In modern market economies, government participation
can support market exchanges and improve economic
performance.
OBJECTIVES:
•To explain the relationship among households, firms, and
markets in a market economy.
•To explain the government’s role in a market economy.
•To describe how the government fits into the circular flow
model of the economy
HOUSEHOLDS, FIRMS,
AND MARKETS
A household consists of an
individual or a group of people
who live together and share
income, such as you and your
family.
1. Households purchase
goods and services from
businesses.
2. Households provide land,
labor, capital, and
entrepreneurship (resources)
from which goods and
services are produced.
HOUSEHOLDS, FIRMS,
AND MARKETS
A firm is a privately owned organization that
produces goods or services and sells them to others.
THE SIMPLE
CIRCULAR FLOW
THE SIMPLE
CIRCULAR FLOW
Product markets
are where goods and services
are exchanged for money.
Factor markets
are where resources are
exchanged for money.
GOVERNMENT’S ROLE
IN A MARKET ECONOMY
1. A government can establish and enforce rules
that improve market performance.
2. A government can provide important goods and
services that private individuals tend not to
purchase.
3. A government can help improve economic
security, equity, and sustainability.
GOVERNMENT IN THE
CIRCULAR FLOW
Government in the
Circular Flow
Module 6 Review
What is…
A. Household?
B. Firm?
C. Circular flow diagram?
D. Product market?
E. Factor market?