Chapter 2
Economic Systems
Long Term Objective (LTO)
Explain the three economic systems
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• Kraus, Connie
• Chapter 2 Economic Systems slideshow
Ch 2, Section 1
Short Term Goals (STGs):
1. Identify the three key economic questions
that societies/governments face.
2. Describe society values that determine how
a country answers the Three Economic
Questions.
3. Describe the Three Economic Systems and
how they were/are influenced by society.
Three Economic Systems
Free Market
No Gov involvemt
in economy.
NO Safety Nets.
Economic
Systems
Mixed Market Government
stimulates/regulates
economy
Command
Economy/Centrally
Planned Economy
Government
controls ALL
economic issues.
Continuum (Varying Degrees of
Involvement)
Free Market
• NO Government control over prices, interest
rates or production. “Invisible Hands”
• NO welfare, food stamps, disability checks…
• Business owners & Buyers decide the THREE
ECONOMIC QUESTIONS:
1. WHAT to produce
2. HOW to produce
3. WHO consumes what is produced
Why do Free Market supporters believe
government involvement in the economy is
unnecessary?
A: The Invisible Hand regulates the economy.
•
•
What is the Invisible Hand?
The un-observable market force that helps the demand and supply of goods in a free market to
reach equilibrium automatically is the invisible hand.
•
Definition: The unobservable market force that helps the demand and supply of goods in a free
market to reach equilibrium automatically is the invisible hand.
Description: The phrase invisible hand was introduced by Adam Smith in his book 'The Wealth of
Nations'. He assumed that an economy can work well in a free market scenario where everyone will
work for his/her own interest.
He explained that an economy will comparatively work and function well if the government will
leave people alone to buy and sell freely among themselves. He suggested that if people were
allowed to trade freely, self interested traders present in the market would compete with each
other, leading markets towards the positive output with the help of an invisible hand.
•
In a free market scenario where there are no regulations or restrictions imposed by the
government, if someone charges less, the customer will buy from him. Therefore, you have to
lower your price or offer something better than your competitor. Whenever enough people
demand something, it will be supplied by the market and everyone will be happy. The seller end up
getting the price and the buyer will get better goods at the desired price.
Source: Economic Times
Free Market
Examples: Primitive cultures, some
3rd World nations.
Explanation:
Sellers decide if paint has harmful
chemicals.
Buyers: Goods & Services are
consumed by those who have the $$
for it.
Mixed Market Economies
• Ex: Most nations
1.
2.
3.
4.
United States
Mexico
China
Russia
Mixed Market Economies
• Most nations’ government get involved in
their country’s economy
• Why?
– Because society’s values have changed.
– Too much poverty can lead to Revolts/overthrow
of government leaders
Command Economies
/Centrally Planned Economies
• Government has highest level of control over
production and prices than in Mixed Market.
• Usually have a Dictator or Political System
with only 1 Political Party-Communist.
• NOT very efficient (except in focus area)
• Few choices/less variety
• Usually have no:
– unemployment
– homeless
Centrally Planned Economies
• EX:
1. North Korea
2. Cuba
3. (less extent) Argentina
How do countries choose which
system?
• Depends on the values of their society.
• Culture, religion and historical events play a
part.
– EX:
1. Some religions believe that you should help the poor.
2. Shirtwaist Factory Fire – led to workplace safety rules.
Pg 25, Figure 2.2
• Use the explanations in the Economic Goals
table to rate these nations on how well you
think they meet those goals.1=Lowest,
3=Average, 5=Hi
United States
Efficiency
Economic Freedom
Economic
Security/Predictability
Distribution of Wealth
Growth/Innovation
Environmental Protection
China
Mexico
Free Market
Mixed Market
Command Economies
No Safety Nets
Hi level of consumer
protection
Highest level of Gov’t
involvement = little product
variety.
Generalities
Lowest standard of living for Product Quality - Hi
most of the population.
Usually low quality of
consumer goods
Small group of Wealthy have Product Safety - Hi
the most power.
Economic Security-Highest
No unemployment/homeless
Very small middle-class.
The Market (Buyers &
Least innovative.
Sellers) decide MOST of the
Three Economic Questions,
but Gov’t does stimulate the
economy & regulates
business.
Quality of Goods/Safety of
Goods: Depends on $ and
Status of the Buyer.
Highest level of innovation
Closest to achieving ONE
Economic Class. NO WEALTHY,
POOR OR MIDDLE CLASS.
The Market decides ALL of
the Three Economic
Questions
Economic Predictability
Good – SAFETY NETS, but
does have UNEMPLOYMT.
Gov’t decides WHO gets
WHAT. Reward patriotism &
Political Party Officials.
Factor Payments
• What/How you are paid for supplying
– Factors of Production:
1. Land – Rent, Lease, Mortgage Payments
2. Labor - Wages
3. Capital – Pay Interest when you borrow $$
• Entrepreneurs earn PROFITS if the business
makes money.
GROUP PROJECT:
• Teams will create a poster on ALL THREE ECONOMIC
SYSTEMS (NOT JUST ONE).
• Poster must:
– Answer HOW each system handled the 3 economic
questions.
– Pros of each system
– Cons of each system
– Examples of each system (country)
• Cannot be smaller than sheet of construction paper
– Suggest using a display board (foam core,…)
– Cannot be rolled up.
GROUP PROJECT RUBRIC
• Group Grade: Poster is complete, factual, neatly
typed with titles, at least one visual, captions &
labels. It must explain, not just list. Ex: Which
system is most efficient AND WHY.
• A-Meets all requirements
• B-Minor mechanical flaw (Ex: spelling)
• C-Missing/incorrect factual info (minor content)
• D-Hard to Read/follow. Major content errors.
• F-Incomplete
Group Project – Individual Grade
• Each person is REQUIRED TO CONTRIBUTE – even
if you’re absent, e-mail your portion to the Team
Leader.
• A = did all assigned work correctly and
completely by deadline
• B = sloppy
• C = minor error/missing work
• D – major error/missing work
• F – did not meet deadline/did not do the work
Group Project
•
•
•
•
Due Friday, September 21st by beginning of class.
Worth 100 points – Group Grade
Worth another 100 points – Individual Grade
Teams: pick a Team Leader who is Organized &
Excellent Attendance. That person will ASSEMBLE
every member’s typed contribution. (NOT DO IT for
them).
• Divide the work evenly. Confirm what each person
must do and when they have to get it to the Team
Leader. Ex: Wednesday 7 pm
• Have a Backup Person for each job. So, each person has
a Primary Job and a Secondary Job.
Group Project
• Be Problem Solvers
• Technical Difficulties are NO excuse.
• Don’t wait until the last evening before
deadline to finish. Test out the digital file at
least one day before deadline.
• I will be here every day except Tuesday until
3:15 PM to help.
Tuesday – Sub Day
• BE ON YOUR BEST BEHAVIOR
• NO PASSES EXCEPT TO THE NURSE (AND ONLY
IF YOU’RE ILL ENOUGH TO GO HOME)
• All desks must be put back in rows
• The room must be NEAT – No trash or paper
on the floor.
• ABSOLUTELY NO FOOD OR DRINKS – NOT
EVEN GATORADE OR POWERADE.
Section 2:
STGs
Explain:
• Why markets exist
• Analyze circular flow model of free market
economy
• Understand the self-regulating nature of
the marketplace (“invisible hands”)
• Identify the advantages of a free market
economy
A Market
• Why does a Market exist?
– Exists because no one can produce all of the
goods and services that he/she needs.
• What is a Market?
– Where buyers and sellers exchange goods and/or
services
A Market
• Allows people to specialize in producing goods
or services that they are the best at
making/providing
Free Market Economy
• The type of economy that was most common
centuries ago
• The original type of economic system
• See previous slides
Circular Flow Model
of a Free Market Economy
• Pg 30, Figure 2.3
• Answer the following questions:
1. How does $ flow FROM households to firms?
2. How does $ flow FROM firms to households?
3. When firms make more $ than expenses, the
firm makes a ______.
4. You provide labor and get _____.
Invisible Hands
• Used to explain the efficient, self-regulating
nature of the Free Market
• Theory by Adam Smith
• Explain how Self-Interest and Competition
make the Free Market work. (Write in pencil in
your notebook. We’ll check the answer in 5
minutes. Work with a partner.)
Free Market – Advantages (Pros)
1.
2.
3.
4.
Economic Efficiency
Economic Freedom
Economic Growth
Widest Variety of Goods & Services because
firms compete to provide what sells. So, firms
specialize to meet their customer’s
needs/wants. Customers decide what is
produced (buy what they want/do NOT buy
other items). This is CONSUMER SOVEREIGNTY.
Ch 2, Section 3
Centrally Planned Economies
(Command Economies)
• STGs
1. How is it organized?
2. Analyze the pros/cons of a Command
Economy.
3. Give pros/cons of the former USSR.
Centrally Planned Economies
(Command Economies)
• The Government decides the Three Economic
Questions
• No Consumer Sovereignty
• Usually under an Authoritarian Regime
Socialism and Communism
• Socialism –
– May have a Democratic government
– Less autocratic than Communism
– Still have a High Degree of Government Control
over the economy
Socialism and Communism
• Communism
– All ECONOMIC & POLITICAL POWER is held by a
Central Government
– Tend to spend more $ on Guns (Capital Goods)
than Free Market and Mixed Market
– Little/no incentive for workers to produce more
– Can excel in their focus industries:
• USSR – steel output, tractors, ballet, symphonies
Ch 2, Section 4
Modern Economies
• STGs
1.
2.
3.
4.
Explain the rise of Mixed Economic Systems
Interpret a Circular Flow Model of this system
Compare the countries along the Continuum
Explain the role of Free Enterprise in the U.S.
economy
The Rise of Mixed Markets
• Economic Systems have evolved from Free
Market systems
• All have pros/cons
• Most nations are Mixed Markets
Control vs Economic Freedoms
• Nations try to balance their nation’s need for
government control and economic freedoms:
• Examples
–
–
–
–
–
Safety Nets = more taxes
Less Taxes = Fewer/Less Safety Nets
No homelessness – Govt owns ALL private property
No unemployment – Govt decides who works where
Paying too much for gas, cable, electricity,..?
• Should govt regulate prices?
• Should govt own the industries?
Pg 43, Figure 2.5
Continuum of Economic Systems & Nations
NOTE:
• Hong Kong is less of a Free Market than when this book
was printed.
• Hong Kong is a part of China. Since the lease with
Britain ended, China has started to exert more control.
• Hong Kong is still less controlled than mainland China.
• China has now moved farther away from Centrally
Planned. It is privatizing – factories are now owned by
individuals in most industries.
Wrap Up
• Economic Systems are still changing
– Based on changing values/demands of its people
– Laissez Faire – No govt intervention in the market
• Has resulted in many negatives for consumers &
workers
• Most profitable (usually) for business
• Can restrict growth in some industries
– Ex: India – sewage treatment lacking due to lack of govt
intervention
Wrap Up
• Free Enterprise – Allowing people to start
and control their own business.
– Major Role in U.S. development
– Balancing Act:
•
•
Allowing enough freedom for businesses while still
protecting workers and consumers
Protecting U.S. businesses (against foreign businesses
who have lower costs) or not.