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.