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?
Are your favorite goods produced?
• Is your favorite food sold?
• Is your least favorite food sold?
• If your favorite food is easier to find then your least
favorite world, resources are being allocated well to
serve your dietary needs.
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Chapter 2: Modules 4,5 & 6
How should we produce a guitar?
• A guitar can be made by workers
• A guitar can be made alone
• Small number of jigsaws
• Industrial robots
• Materials- lots of decisions need to be placed
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Chapter 2: Modules 4,5 & 6
For whom should it be produced?
• One must think about their target audience
• Demographics
• SES
• Age
• Potential changes in that field
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Chapter 2: Modules 4,5 & 6
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- correlated to
standard of living
• Efficiency- example of meat in India
• Equity- sense of fairness
• Economic Security- the confidence and
ability to support themselves and their
families; leads to a social safety netgives assistance to those in needs
• Economic Freedom- people the ability
to make economic decisions for
themselves
• Quality of life
• Sustainability
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?
G. Allocated?
H. Equality of outcome?
I. Equality of opportunity?
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.
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.
•To describe the tradeoffs different countries make in
designing social safety nets.
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
A public good is a good or
service that can be consumed
by many people at once and
that other people can’t be
prevented from using.
Transfer payments
are expenditures for which
the government receives
no good, service, or
resource in return.
Government in the
Circular Flow
INTERNATIONAL
PERSPECTIVES
Countries have to decide if they want a strong
safety net or a weak one.
More public goods and transfer payments tend to
increase the tax rate.
Module 6 Review
What is…
A. Household?
B. Firm?
C. Circular flow diagram?
D. Product market?
E. Factor market?
F. Factor payment?
G. Property right?
H. Public good?
I. Transfer payment?
J. Regulation?