Today’s Objectives

Introduce Chapter 3 – Markets

You will…
 Have a better understanding of PPF and
productivity
 Study for your quiz next class (summative
grade)
 Understand the 3 types of markets and how
they operate within a society
CHAPTER 3
5 Fundamental Questions of All Economic
Systems

What goods and services will be produced?
○ Limited by scarcity of resources

How will the goods and services be produced?
○ Limited by the human capital and capital available

Who will get the goods and services?
○ How do you decide who “deserves” it?
How will the system accommodate change?
 How will the system promote progress?

Scenario: What Would You Do?

What goods and services will be produced?
○ Of the following, which will you produce for your
people? Choose ONLY 4
 Local Defense, Food, Healthcare, Clothing, Technology,
Transportation, Public Schooling, National Defense

How will the goods and services be produced?
○ Who will produce it? The People or the Government?

Who will get the goods and services?
○ Prioritize the following groups and why they get it first.
○ Rich, Middle Class, Poor, Adults, Children, Sick,
Healthy

Create your “Island” and explain how your
society would work.
What are the goals of choosing an
Economic System?

6 Major Goals to Achieve
○ Have to pick though, impossible to achieve all
○ Can’t be equal and freedom – work against each other
Econ. Freedom
 Econ. Efficiency
 Econ. Equality
 Econ. Growth
 Econ. Stability
 Econ. Security

What are the goals of choosing an
Economic System?

Economic Freedom – all people have full
freedom of what to make and buy or sell
without government interference
 Usually a goal, but tough to achieve fully
 People want protection from violators and
government expected to do this

Economic Efficiency – economy strives to not
waste ANY of its resources
 Includes all natural and human resources
 Has a goal of FULL EMPLOYMENT – no waste
What are the goals of choosing an
Economic System?

Economic Equity – strives to give all in society
an equal amount
 Problems arise with what is equal?
○ Does everyone get a little?
○ Do the rich or the poor receive more?

Economic Growth – strives to produce more and
better goods
 Usually a goal of all economic systems
What are the goals of choosing an
Economic System?

Economic Security – strives to support those in
society who cannot provide themselves
 Includes the too young or old, sick or dying, etc.

Economic Stability – strives to keep the economy
stable and running well
 Keeps things predictable; having goods, water,
electricity, jobs and prices relatively consistent
What is an Economic System?

Economic System – how a country decides to
create, buy and sell products and resources

Three Major Economic Systems
 Traditional/Subsistence – rare; usually found in
clan/nomad life
○ American Indian Tribes, African Tribes
 Socialism and/or Communism - USSR
 Free Market or Capitalism – USA, Europe
 http://www.youtube.com/watch?v=B3u4EFTwprM
Where are the people
in each cartoon?
Who or what decides
what consumers get in
Cartoon A? Cartoon B?
What advantages and
disadvantages do you see
represented in Cartoon A?
Cartoon B?
Which store would you
prefer to shop in, and
why?
Command Economy
Socialism or Communism
 All Fundamental Questions
answered by a government
bureaucracy.

○ Government commands what is
created and how much

A central plan was created to
determine the parameters of
the economy.
○ Limits flexibility of products and
creates shortages
Failure of the Command
Economy

Coordination of economy was a HUGE job
○ Must plan for EVERY product a nation needs

No accurate measurement of success
○ No incentive to produce faster or better
○ No chance to improve by showing your productivity
Mistakes were made
 Problems in supply of one product could
adversely affect other products (lack of
substitutions)

The Market Economy
Capitalism
Private ownership of
resources
 Markets determine
economic activity (i.e.
“supply and demand”)
 Consumers themselves
answer some of the
fundamental questions
 Government plays a role
– regulation, encourage
competition and
fairness, but not direct
role in setting prices.


NORTH KOREA
EXTREMELY
RESTRICTED BY
THE GOVERNMENT
HONG KONG
EXTREMELY FREE
FEW REGULATIONS
“The Invisible Hand”

Idea created by Adam Smith in his book The
Wealth of Nations (1776)
 Adam Smith is the “father of Economics”

People’s self-interest actually benefits the
social interest without the person knowing
○ An actual “invisible hand” running the economy
○ Coordinates needs even if you’re being evil
 Meaning selfishness still helps to run the economy
Competition results in maximization of profits
at lowest possible cost to consumers
 60 Second Lessons in Economics

Incentives in a Market Economy

Hard work, skill, innovation = more sales,
more profit
○ Potential personal gain may result in better life
Assuming of risk is encouraged = desire for
greater wealth
 Freedom of choice – further own self-interest
through choices made in the market.
 Private Property – ideas and goods are
yours; not owned by the government

Private Property
 What
is your definition of
private property?

The right of private persons and firms to
obtain, own, control, employ, dispose of,
and bequeath land, capital and other
property
 What
are the advantages of
an economic system which
allows people to own