Economic System Economic System – method used by society to allocate/distribute the scarce resources in order to bring goods and services to the people Three Economic Questions 1. 2. 3. What goods and services should be produced? How should these goods and services be produced? For Whom to produce them for? Four Economic Systems 1. 2. 3. 4. Traditional economy – relies on habit, custom, or ritual to decided the 3 economic questions Market economy – economic decisions are made by buyers and sellers trading freely. Command Economies – in a centrally planned economy, the central government decides how to answer the three economic questions. Mixed Economies – most modern economies are mixed economies, marketbased economic systems in which government plays a role in the market. Economic Freedom Economic Freedom - freedom to buy or sell what we want, make choices with little interference by the government • Individual – where to work, study, consume • Business – what, where and how to produce Economic Efficiency Economic Efficiency - making the most of scarce resources, using your resources wisely and productively •Technological innovations allow society to be more productive • Humans to robots Economic Security Economic Security - government will provide a safety net in times of economic downturns • Social Security, welfare, unemployment checks, etc. Economic Predictability Economic Predictability - knowing that goods and services will consistently be available • Gas, food, energy, etc. Economic Equity Economic Equity – Fair work for fair pay; being paid according to your skill level • Lebron James is higher paid than a teacher • A teacher is higher paid than a cashier at Wal-mart Economic Growth Economic Growth – improving the economy from year to year, improving people’s standard of living • Individual – better jobs, nicer homes, newer cars….better stuff! • Business – produce more, increase customers, open new factories, etc. Economic Innovation Economic innovation – improving upon existing technology in order to improve efficiency. • Walkman to the iPhone, Record Player to Digital Media Additional Goals Additional Goals – future goals for a society • Environmental protection, full employment, universal medical care, etc. Statements 1. 2. 3. 4. 5. 6. 7. 8. Last week I willingly enrolled in college courses at Coastal. I am so happy that I make my decisions about my future. My uncle lost his job, but thankfully he is able to receive unemployment checks. Wal-Mart recently upgraded all of their registers to touch screen monitors. General Motors replaced all of their human workers with robots in order to increase productivity. As a result of the internet and technology, our economy has experienced significant expansion over the past 30 years. I can always expect Publix to have the food I like! Hopefully in the future we will have full employment. With every degree/skill I earn, I improve my ability to make money. Economic Goal 1. Economic Freedom 2. Economic Security 3. Economic Innovation (Efficiency) 4. Economic Efficiency (Innovation) 5. Economic Growth (Innovation) 6. Economic Predictability 7. Additional (Future) Goals (Equity) 8. Economic Equity (Growth) Imagine that you are walking into Walmart. List 3 items that you could purchase and the departments that you would find them in. The Free Market Market – buyers and sellers meet to exchange goods and services Market Economy – economic decisions are made by consumers and businesses based on buying and selling of goods and services All resources are privately owned The government has a very limited role Voluntary Exchange Voluntary Exchange – is the act of buyers and sellers willingly and freely engaging in market transaction where both parties benefit. Examples: When I buy gasoline, I get energy for my car, the firm gets my money Role of the Consumer Consumer Sovereignty - in a free market, consumers determine the goods that are produced; this makes them "sovereign“ or the ruler over what is produced in an economy. “Ruler” of the market; expressed through a dollar vote for products when we make purchases. “The customer is always right”. When consumers buy products, their “dollar vote” signals to producers what to make and how much. Specialization – the separation of tasks; people focus on a specific purpose/task Division of Labor – Workers perform fewer tasks in order to operate more efficiently Specialization Examples Social Studies Math Science English Specialization Examples Rancher Publix Worker Slaughter House Final Good (Output) Meat Cutter Consumer Good Specialization and Efficiency Productivity – average amount of output (good or service) per unit of labor input Increased productivity means to do more with less Capital investments allow increased efficiency Specialization and Productivity 1 Farmer 10 hours to till the land 1 Farmer 1 hour to till the land Productivity Creates Wealth 3rd World Countries Developed Countries 22 Productivity Mary looks over reports on four of her workers. Jack made 25 baskets in 5 hours. Walter made 36 baskets in 6 hours. Rudy made 40 baskets in 10 hours. Sam made 22 baskets in 4 hours. Jim made 50 baskets in 10 hours. Who has the greatest productivity? Jack 25/5 = 5 Baskets per hour Walter 36/6 = 6 Baskets per hour Rudy 40/10 = 4 Baskets per hour Sam 22/4 = 5.5 Baskets per hour Jim 50/10 = 5 Baskets per hour Walter has the greatest productivity Households and Firms Household – Person or group of people living in a residence Consumers - use the final goods and services (outputs) to satisfy wants and needs Firm – business organization that uses resources to produce goods/services, which it then sells Suppliers – transform “inputs” (F.O.P.) into “outputs” (products) Product Markets Product Markets – Households and firms interact; producers sell their goods and services to consumers Households are buyers of goods and services Firms are sellers of goods and services (outputs) Factor Markets Factor Markets – the markets where productive resources (F.O.P are bought and sold Inputs: Firms are the buyers, households are the sellers Labor - Firms (businesses) hire workers and pay them salaries Land - Purchas/rent land Capital - Use money from households (savings, investment, etc) to purchase capital goods Circular Flow Model - shows the flow of money and inputs/outputs from and to firms and households in a market economy Consumer Spending Business Revenue Product Market Consumer Goods and Services Purchased Households Firms Land, Labor, Capital, Entrepreneurs Income, Wages, Salaries Goods and Services (outputs sold Inputs for production Factor Market Payments for the F.O.P Daily Assignment - Circular Flow Model of Economic Activity Consumer Spending Business Income 1. _________________________ 1. _________________________ Product Market Goods Purchased Goods Offered 1. ___________________________ 1. ______________________________ 2. ___________________________ 2. _______________________________ Firm Household 1. ________________________ Firm 1. _____________________________ Firm 2. _____________________________ Input for Production Factor of Production Offered 1. ___________________________ 1. ___________________________ Weekly Income 1. __________________ Factor Market Payments for F.O.P 1. _________________ Daily Assignment - Circular Flow Model of Economic Activity Consumer Spending Business Income 1. _________________________ 1. _________________________ Product Market Goods Purchased Goods Offered 1. ___________________________ 1. ______________________________ 2. ___________________________ 2. _______________________________ Firm Household 1. ________________________ Firm 1. _____________________________ Firm 2. _____________________________ Input for Production Factor of Production Offered 1. ___________________________ 1. ___________________________ Weekly Income 1. __________________ Factor Market Payments for F.O.P 1. _________________ Circular Flow Model of Economic Activity Consumer Spending Business Income 9.49 1. _________________________ 1. _________________________ 9.49 Product Market Goods Purchased Goods Offered Tacos Burritos 2. ___________________________ Fajitas Fajitas 1. ___________________________ 1. ______________________________ 3.___________________________ Household Elisa 1. ________________________ Marcella 2. ________________________ Firm Cilantros Firm 1. _____________________________ Books a Million Firm 2. _____________________________ Input for Production Factor of Production Offered 1. Labor/Salesperson 1. ___________________________ 2. 3. Weekly Income 200 1. __________________ Factor Market Stockers _________________________ Coffee Sellers _________________________ Cashiers ________________________ Payments for F.O.P 3000- Lease 1. ________________ 2200 – Electric 2. ________________ 3. ________________ 400 - Water Circular Flow Model of a Mixed Economy Consumer Spending/Investing Business Income/Revenue Product Market Goods and Services Sold Goods and Services Purchased: Households Expenditures Expenditures Land, Labor, Capital, Entrepreneur Income to Households/Individuals Firms Inputs for Production (F.O.P.) Factor Market Payment for F.O.P. – Wages, rent, capital goods Name________________________________________________________________________ Flow Chart – American Free Enterprise, pgs. 52-53 American Free Enterprise Economic Freedom Competition Private Property Rights Self-Interest Voluntary Exchange Profit Motive Description Description •Individuals’ right to choose their occupation and what to buy. •Firms’ right to hire or produce. Description Description Description Description Description Examples 1. I had the 1. freedom to become a teacher and a coach; I can buy 2. whatever I want. 2. Firms range from automakers to fast food. Examples Examples Examples Examples Examples 1. 1. 1. 1. 1. 2. 2. 2. 2. 2. Economic Freedom Description - Individuals’ right to choose your occupation and what to buy. Firms’ right to hire or produce. The right to conduct yourself with little government interference. Examples: 1. I had the freedom to become a teacher and a coach; I can buy whatever I want. 2. Firms range from automakers to fast food. Economic Freedom Competition Competition – efforts among sellers/producers to attract consumers at various prices Examples: Mcdonalds vs. Burger King Walmart vs. Target Private Property Rights Description – Individuals and businesses own property; have the right to buy and sell as much property as they want Examples: Households and firms own property and enjoy the protection of the property Firms can own and operate their business with limited interference from the government Description - Households and firms make decisions in their best interest Self-interests benefits the entire well-being of society. Examples: I recently purchased food from Publix, which satisfied my needs I worked as a summer school teacher to help increase my pay Voluntary Exchange Voluntary Exchange – is the act of buyers and sellers willingly and freely engaging in market transaction where both parties benefit. Examples: When I buy gasoline, I get energy for my car, the firm gets my money Profit Motive The force that encourages people and organizations to improve their material well-being Examples Many people in our society are driven by the desire to make money, which ultimately benefits the market People in the U.S. are rewarded for innovations and efficiency via cash incentives Chapter 2 Section 2 – Daily Assignment Economic Profile Adam Smith pgs. 33 1. 2. 3. What was Adam Smith’s ethnic and professional background? •Scottish, Philosopher, Professor What was the name of the book that he published; when was it published? •Wealth of Nations, 1776 What did Smith identify in the book? •Land, labor and capital as the factors of production that generate wealth 4. What did he assert about specialization and division of labor? • Specialization increases productivity 5. What did he believe about the role of government in the economy? •Government should leave individuals as free as possible to pursue their interests 6. Define the French term Laissez Faire; why did Smith believe in Laissez-Faire economics? •Let them do as they please, Individuals try to pursue their own self-interest will benefit all of society 7. What is meant by his metaphor of the Invisible Hand? • Invisible force that controls the market 8. How do both consumers and businesses benefit from this philosophy? •Consumers buy what they want, producers supply for profit Buyer and Seller Buyer, Seller and the Government The Market for Guns The Market for Guns Airline Market Airline Market Television and Radio Role of the Government in a Market Economy Government acts an informer, protector, provider, and regulator Government has the responsibility to protect property rights, inform the public and oversee business activities Role of the Government in a Market Economy Government acts an informer, protector, provider, and regulator Government has the responsibility to protect property rights, inform the public and oversee business activities Role of the Government as Informer Role of the Government as Informer: Make sure that producers provide consumers with full disclosure Consumers use govt. info. to protect themselves from dangerous products and fraudulent claims. Role of Government as Protector Role of government as a protector: Federal government acts to preserve competition, regulates airlines, communications, banking, etc. Though they do not control it, they impose various restrictions on the private market Gas stations, must dispose of used motor oil properly Zoning laws, prevent homeowners from running businesses out of their homes Negative Effects of Regulation Government regulation can have negative effects on businesses and consumers Negative effects: 1. New rules can increase the cost of business 2. Government oversight can cause reduced incentives to produce 3. Increase of governmental spending can lead to higher taxes A Florida law requires vending-machine labels to urge the public to file a report if the label is not there. The Federal Railroad Administration insists that all trains must be painted with an “F” at the front, so you can tell which end is which. Bureaucratic busybodies in Bethesda, Maryland, have shut down children's lemonade stands because the enterprising young entrepreneurs did not have trading licenses. In Georgia, it is illegal to use profanity in front of a dead body which lies in a funeral home or in a coroners office. No one may carry an ice cream cone in their back pocket if it is Sunday. Against the law to tie a giraffe to a telephone pole or street lamp. One man may not be on another man’s back. No person may be buried under a sidewalk of a cemetery. Government as a Provider Public sector- the part of the economy that involves the goods provided by the government Private sector- the part of the economy that involves the goods provided by private firms Public Goods and Services Public Good/Service - A shared good or service for which it would be impractical to make consumers pay individually and to exclude nonpayers. Education, Military, National Park, Snow Removal, Police, Firefighters Redistribution of Income When the government takes from one group and reallocates to another group Welfare, Social Security, Unemployment, Food Stamps, etc. Market Failure The market, on its own, does not distribute resources efficiently Free riders, monopoly, roads and bridges in a sparsely populated area, etc. Negative Externalities Negative Externality – negative effects experienced by people that had no part in the consumption of a good or service Cigarette smoker, chemical waste dumping, foreclosures and property values, etc. Negative Externalities Positive Externalities Goods/services that generate benefits to many people, not just those who pay for the goods Education, better technology, medicine, etc. Free-Rider Problem A free rider is someone who would not choose to pay for a certain good or service, but who would get the benefits of it anyway if it were provided as a public good Application Question Write an example of a negative and positive externality. What kind of government regulation could be used to eliminate your negative externality? Command Economies Command – central authority owns and operates the Factors of Production Centrally Planned Economy – central government answers the three economic questions; WHAT to produce, HOW to produce, and FOR WHOM to produce Oppose private property, free market pricing, economic freedom Socialism and Communism Karl Marx – German social philosopher that studied economic systems in Europe Communist Manifesto – written by Marx and Frederick Engels became basis for modern-day command economies Thought capitalism would fail because it put too much wealth in the hands of few and left everyone else poor Believed in a “no-class” system, where all share in wealth/power Socialism – distribution of wealth and F.O.P. equally amongst society Communism – political and economic system with centralized economic decisionmaking Authoritarian Government – exact strict obedience from their citizens; do not allow individual freedom Chapter 2 Section 3 – Daily Assignment Questions “The Former Soviet Union” pgs. 36-38 How did the Soviet Union arise? 2. Where did Soviet planners allocate the factors of production? 3. How did the Soviet Union control agriculture? 4. What three industries did Soviet Planners favor? 5. How did the Soviet Union view entrepreneurial endeavors? 6. What was the quote used by Soviet consumers as a joke? 7. Why were Soviet Consumers’ left unsatisfied? Page 39 – Russia in Crisis 1. How did many Russians initially respond to the Communist collapse? 2. What happened over the next decade? 3. How did Russia deal with corruption? 4. What were some characteristics of Russia’s financial problems? 5. What evidence can be seen that success is in sight? 1. Scenario 1 You have two cows. You trade one to your neighbour for a bull. You only produce what you need to survive. Scenario 2 You have two cows. The State takes both and gives you just enough milk to live Scenario 3 You have two cows. You sell one and buy a bull. Your herd multiplies, and your wealth grows. You sell your herd and retire on the income. 1. 2. 3. 4. What economic system matches each scenario? Which scenario do you think is the most ideal and why? Which scenario do you think sounds the most like the United States? Why? What countries do you know of that could fall into scenario 2. Modern Economies Free Enterprise – competition in the marketplace is allowed to flourish with no interference from government Modified Free Enterprise (mixed economy) – businesses are free to compete with some government regulation/intervention Centrally Planned Free Market Mexico North Korea France Hong Kong Iran South Africa Cuba United Kingdom Canada China Poland Japan United States Singapore Laissez Faire in a Modern Economy Laissez Faire – no government intervention in the economy Some government intervention is necessary in the economy; some needs are difficult to answer in the marketplace National defense, roads and highways, education, etc… Government acts a protector, regulator and overseer of economy Government Money Taxes from both households and businesses Income tax, state income tax, social security, Medicare/Medicaid, unemployment insurance, etc. Government in the Factor Market Government purchases land, labor, and capital from households United States gov’t pays 2.8 million employees $9.7 billion for labor Government in the Product Market Government purchases goods and services from firms (businesses) Office supplies, telephones, computers, etc. Economic Goals Market Command Tradition Economic Freedom Yes - freedom to buy and sell No – controlled by the government No – roles are based on custom, heritage and tradition Economic Efficiency Yes – productivity = money No – Many resources go unused No – inefficient by modern standards Economic Security No – laissez-faire, no government Yes – government provides jobs Yes – assigned roles Economic Predictability Yes – free trade ensures many products are available No – government mismanagement can lead to shortages No – Hunter Gatherer problem Economic Equity Yes – paid based on skills No – collectivism (no individualism) Yes/no – everyone shares Economic Growth Economic Innovation Yes – competition and profit motive Yes – innovation and technology leads to profit Slow - lack of profit motive Limited – lack of innovation because of a lack of incentive No – little to no innovation No – lack of modern innovations Essential Question #1 1. How do each of the economic systems answer the three economic questions? 1. 2. 3. 4. Tradition – based on habit, ritual, custom Market - based on buyers and sellers Command – based on central planners/government Mixed – based on a market economy, with government regulation Essential Question # 2 2. What do the economic and social goals help us to understand? • Explain how each society provide goods and services to satisfy wants and needs for their people, in light of scarce resources. Essential Question #3 How does the Circular Flow model show a market economy? • Flow of money from households to firms (product market); firms to households (factor market). • Flow of final goods and services (outputs) to households (product market), and factors of production (inputs) to the firm (factor market). Economic Systems Tradition Tribal Living Command Government Controls the Economy Market Buyers and Sellers Control the Economy Mixed Buyers and Sellers operate while Government Regulates the Market 3 Economic Questions What to Produce? How to Produce it? Who to Produce it For? Freedom Efficiency Security Predictability Equity Growth Innovation Additional Goals Consumer Sovereignty Competition Property Rights Self-Interest Voluntary Exchange Profit Motive Specialization Division of Labor Inputs Outputs Public Sector Private Sector Public Goods/Services Regulate Inform Protect Provide Market Failures SSEF3 The student will explain how specialization and voluntary exchange between buyers and sellers increase the satisfaction of both parties. a. Give examples of how individuals and businesses specialize. b. Explain that both parties gain as a result of voluntary, non-fraudulent exchange. SSEF4 The student will compare and contrast different economic systems and explain how they answer the three basic economic questions of what to produce, how to produce, and for whom to produce. a. Compare command, market, and mixed economic systems with regard to private ownership, profit motive, consumer sovereignty, competition, and government regulation. b. Evaluate how well each type of system answers the three economic questions and meets the broad social and economic goals of freedom, security, equity, growth, efficiency, and stability. SSEF6 The student will explain how productivity, economic growth, and future standards of living are influenced by investment in factories, machinery, new technology, and the health, education, and training of people. a. Define productivity as the relationship of inputs to outputs. SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money. a. Illustrate by means of a circular flow diagram, the Product market; the Resource (factor) market; the real flow of goods and services between and among businesses, households, and government; and the flow of money.