Liberty or Equality?
 What key economic questions must every society
answer?
 What basic economic goals do societies have?
 What types of economic systems exist today?
 Every society must answer three questions:
 (1)What goods and services should be produced?
 (1)How should these goods and services be
produced?
 (1)Who consumes these goods and services?
 Societies answer the three economic questions based
on their values.
(2)Economic efficiency
(2)Economic freedom
(2)Economic security
and predictability
(2)Economic equity
(2)Economic growth and
innovation
Other goals
Making the most of resources
Freedom from government intervention in the
production and distribution of goods and
services
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
Fair distribution of wealth
Innovation leads to economic growth, and
economic growth leads to a higher standard of
living.
Societies pursue additional
goals, such as
environmental protection.
An economic system is the method used by a society to
produce and distribute goods and services.
(3)Traditional economies rely
on(4) habit, custom, or ritual to
decide what to produce, how to
produce it, and to whom to
distribute it.
In a(3)centrally planned or
command economy the central
(4)government makes all
decisions about the production
and consumption of goods and
services.
In a (3)market economy
economic (4)decisions are
made by individuals and are
based on exchange, or trade.
(3)Mixed economies are
systems that (4)combine
tradition and the free market
with limited government
intervention.
 How do free markets operate?
 How can markets regulate themselves?
 What are the advantages of a free market economy?
Markets exist because none of us produces
all the goods and services we require to satisfy our needs
and wants.
A market is an (5)arrangement
that allows buyers and sellers to
exchange goods and services.
Specialization is the concentration
of the productive efforts of
individuals and firms on a limited
number of activities.
 In every transaction, the buyer and seller consider only
their self-interest, or their own personal gain. (6)Selfinterest is the motivating force in the free market.
 Producers in a free market struggle for the dollars of
consumers. This is known as (7)competition is the
regulating force of the free market.
 The interaction of buyers and sellers, motivated by
self-interest and regulated by competition, all happens
without a central plan. This phenomenon is called
“the invisible hand of the marketplace.”
(8)Economic Efficiency
 As a self-regulating system, a
free market economy is efficient.
(8)Economic Growth
 Because competition encourages
innovation, free markets
encourage growth.
(8)Economic Freedom
 Free market economies have the
highest degree of economic
freedom of any economic
system.
(8)Additional Goals
 Free markets offer a wider variety
of goods and services than any
other economic system.
 (9)Maximizes liberty
 Adam Smith – 1776 – “The Wealth of Nations”
 “Free Enterprise” – (10)everyone is free to
pursue any economic activity
 (11)Laissez-Faire – do not interfere in the
economy
 Freedom to succeed and freedom to fail
 Private ownership of capital (means of
production)
• (12)Profit is the motivator, (12)competition is the
•
•
•
•
regulator (not government)
Under pure capitalism, almost all goods would be
provided by the private sector (small government) –
police, courts, military (even schools and the fire
department could be private goods)
Do not tax the rich more than the poor – no
redistribution of income
(13)Good of the individual is above society
Bill Gates and Hobo Joe
Economic (14)Freedom
Americans traditionally place a high value on the freedom to make their own economic decisions.
Economic (14)Equality
Americans have a strong tradition of justice, impartiality, and fairness.
Economic (14)Security
Americans desire protection from bad economic events - layoffs, illness, recessions.
(14)Price Stability
People want to keep prices stable and limit inflation because with high inflation, people are forced to pay
more for food, clothing, supplies, etc. This is especially harmful to people on a fixed income. Sometimes high
inflation can also discourage business activity - just becomes too costly
Economic (14)Efficiency
Because resources are scarce, the factors of production must be used wisely!! If resources are wasted fewer
goods can be produced, and fewer wants satisfied.
Economic (14)Growth
Americans expect the "American Dream" - they hope to have a better job, newer car, own home, and other
things that represent success in life. When you have economic growth, it enables people to have more goods
and services
(14)Full Employment
When people work, they earn income and can support themselves and their families. This goal is very
important to most people!!
 How are centrally planned economies organized?
 How did the centrally planned economy of the former
Soviet Union function?
 What problems exist within centrally planned
economies?
In a centrally planned economy, the government
owns both (15)land and capital. The government
decides what to produce, how much to produce,
and how much to charge.
(Socialism is a social and political
philosophy based on the belief that
(16)democracy means should be
used to distribute wealth evenly
throughout a society.
Communism is a political system
characterized by a centrally planned
economy with (16)all economic
and political power resting in the
hands of the government.
• Maximizes Equality
• Karl Marx – 1848 - “The Communist Manifesto”
• Industrial Revolution – Europe – horrible working
conditions - critique of capitalism
• 1. View of History – (17)class struggle (bourgeoisie and
proletariat)
• 2. Labor Theory of Value – (17)all value comes from labor
• 3. Nature of the State –(17) the state (government)
always sides with the rich
• 4. Dictatorship of the Proletariat – (17)poor must
overthrow the government and set up a classless society
 Public (government) ownership of the means of





production
(18)“From each according to his ability, to each
according to his need.”
Workers run the factories – everyone earns an equal
amount
Lots of government intervention in the economy to
promote equality
Good of society is above the individual
Bill Gates and Hobo Joe
 Soviet Agriculture
 In the Soviet Union, the government created large state-owned
farms and collectives for most of the country’s agricultural
production.
 Soviet Industry
 Soviet planners favored heavy-industry production (such as steel
and machinery), over the production of consumer goods.
 Soviet Consumers
 Consumer goods in the Soviet Union were scarce and usually of
poor quality.
Centrally planned economies face problems of (20)poorquality goods, shortages, and diminishing
production.
• Mix of Equality and Liberty
• Between (21)pure capitalism and pure communism
• Some (22)private ownership and some public
ownership of property
• Some (22)government intervention in the
economy
• (22)Redistribution of income – high taxes on the
rich to provide lots of government services
– Examples of government programs like this in the USA?
Bill Gates and Hobo Joe?
 A FREEDOM
 B FULL EMPLOYMENT
 C PRICE STABILITY
 D EQUALITY
 A BUYERS AND SELLERS
 B FIRMS AND GOVERNMENT(S)
 C SELLERS AND CUSTOMERS
 D FIRMS AND HOUSEHOLDS
 A COMMAND AND FREE MARKETS
 B TRADITIONAL AND COMMAND
 C COMMUNIST AND SOCIALIST
 D TRADITIONAL AND FREE MARKETS
 A PRIVATIZATION
 B SPECIALIZATION
 C CONSUMERISM
 D PRODUCTION FACTOR
 A EFFECIENCY
 B GROWTH
 C MAX POTENTIAL
 D INNOVATION
-EFFECIECNY, FREEDOM, EQUITY, INNOVATION,
PREDICTABILITY ARE THE MAIN GOALS OF AN
ECONOMIC SYSTEM
 A LAISSEZ FAIRE
 B EQUITY EQUATION
 C LABOR RECLUSION
 D DEMOCRATIC PRICE
 A EFFICIENCY
 B LOW COST
 C GROWTH
 D FREEDOM
 A MIXED
 B COMMAND
 C CAPITALISTIC
 D TRADITIONAL
 A TRADE
 B SELF INTEREST
 C COMPETITION
 D PROFIT
 A A COMMUNIST NATION
 B A SOCIALST NATION
 C A CAPITALIST NATION
 D A FREE NATION
 A PRICE
 B EQUITY
 C LABOR
 D LAND
• 1 View of History – class struggle (bourgeoisie and proletariat)
• 2. Labor Theory of Value – all value comes from labor
• 3. Nature of the State – the state (government) always sides with
the rich
• 4. Dictatorship of the Proletariat – poor must overthrow the
government and set up a classless society
 A NORTH KOREA
 B CHINA
 C CUBA
 D SOVIET UNION
 A DIMINISHING RETURNS
 B SHORTAGE(S)
 C LABOR UNREST
 D POOR QUALITY GOODS
 A 70- 30
 B 60- 40
 C 50- 50
 D 90-10