Vocabulary
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Adam Smith- Father of capitalism. He argued his beliefs in his book
“The Wealth of Nations”
Karl Marx- Father of communism. Advocated the violent revolution
of the working class. He argued his beliefs in his book “The
Communist Manifesto”.
Laissez-faire- French term meaning “hands off”. It refers that an
economy functions best when the gov’t stays out of it.
Consumer Sovereignty- Means the consumer is the “King” of the
market and ultimately decides what is produced.
Keynesian Theory- Advocated by John Maynard Keyes, he believed
the gov’t should decrease taxes and increase gov’t spending. Could
lead to massive debt!
New Grading Policy
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I have decided that no one shall receive less than a
C in my course
However, in order to make this happen I must take
higher grades away from other students. So
students with A’s and B’s must give up some points.
This way everyone in class shall receive no lower or
higher than a C. Everyone will be equal.
COMPARING ECONOMIC
SYSTEMS
1.
Resources that could be used for a greater benefit at a
later time are called what?
A.
B.
C.
D.
2.
Productivity
Investment
Capital good
Diminishing returns
In order to increase production and profits, Mark invests
thousands of dollars in a new machine that assembles
lawn mower engines for his company. The machine which
Mark has purchased is what?
A.
B.
C.
D.
An example of improved training
An example of diminishing returns
An example of capital goods
An example of recycling
ECONOMIC SYSTEMS
Traditional Economy

Things are done “the way they have always been
done”
 If
your dad fished for a living you would fish for a
living

Little opportunity for economic advancement
Command Economy

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Major economic decisions are
made by the central government
 Government owns the factors
of production (What are
they?)
 Government decides what is
produced and how it is
distributed, not demand of
consumers.
 Distribution is based on equity
(in theory)
 Equally among citizens
Proven to be failures
 Productivity is based on a
sense of duty not financial
profit

Ex: Communism
 Karl
Marx wrote The Communist Manifesto in 1848
 Describes
the greatness of communism
 Socialism
 Marx
advocated violent revolution in which the working class
would establish government control of capital and property
 When everyone is equal and there is no middle or rich
classes
 Marx
believed socialism would eventually evolve into
communism

No country has ever developed true communism
 China,
 The
Cuba, North Korea
governments of these countries control the economy
through socialist principles
 Fails time & time again
Southeast Asia
Market Economy

Known as “Capitalism”
 Factors
of Production are privately owned
 Producers decide what to produce based on what we
(consumers) demand
 These



choices are made in the market
The market is the exchange of goods/services
The economic exchange is a trade-off
Producers are motivated to the best product because of the
profit motive
•
Consumer Sovereignty


•
The consumer is “king” of the market
Producers try to influence consumers through advertising
Motivating factor for producers is profit and higher
wages/salaries for workers (laborers)

This is the complete opposite if the command economy

Adam Smith writes The Wealth of Nations in 1776
 Defends
the market economy
 The market is directed by the “Invisible Hand”
1.
2.
3.
Competition must exist
Private Property
Free Enterprise

These forces would combine to produce the most efficient
output of goods/services
Laissez-faire

Since the U.S. gov’t limits free
enterprise, it is not a perfect
market economy.
 Minimum
wage
 We are known to have a
mixed economy

Laissez-fair
 “Hands
off”
 The gov’t should stay out of the
economy.
Mixed Economy
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
Combine market and command together
Most countries have this (USA)
 Countries
differ in which economy they most resemble
 The U.S. is closest to a free market society
Keynesian Theory

John Maynard Keyes advocated aggressive
government fiscal policy
 Keyes
believed the gov’t should increase public
spending and decrease taxes
 This
however results in deficit spending
Which Economy is it?
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State planners in Equalia meet to decide what the country
should focus on producing. After deliberating they decided to
use their limited resources to produce automobiles instead of
other consumer goods, such as electronics and clothes. The
state planners passed down their decision to factories, and
allocated to them the raw materials, workers, and other
resources needed to produce automobiles. Factories were then
told how much to produce and who the products should be
shipped to.
Command Economy
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In Petoria, business owners decide what to produce, how much
to produce, for who to produce. The CEO of Crazy Eddie’s
recently decided to increase production levels of the
company’s newest MP3 player model, and at the same time
decrease production levels of their most popular CD player.
The reason for the emphasis on MP3 players is that demand
for CD players has decreased dramatically as MP3 technology
has taken over the market. Simply put there is more profit to
be made in the MP3 market.
Market
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In Hooville, people rarely engage in market transactions. For
the most part, they do not need to. Families grow their own
vegetables and raise their own animals or hunt to get meat.
Certain times get tough for people in Hooville, like when the
winters are particularly cold or animals change their migration
patterns. For this reason, it is important that families stock up
in “good times” and develop relationships with neighbors with
whom they can share and trade.
Traditional
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In Springfield, business owners make most economic decisions.
As long as they can abide by fair trade policies, they can
decide what to produce, how to produce, and for whom to
produce without government intervention. These decisions are
made by business owners based on what happens in the
market. For example, a computer manufacturer recently
developed a new video gaming system, but decided not to
release the system to the public until it was closer to the
holidays because it believed anticipation among customers
would allow the company to charge a higher price for the
system.
Mixed Economy
Closing question?
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What economy did the new grading policy (from
yesterday) most resemble?
Activity Time!
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Put on your creative hats for Ms. Earnest! I hope
you like to draw cartoons!
Vocabulary
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Voluntary Exchange- Business & people freely choose
to exchange goods/services.
Patent- Guaranteed ownership of an invention
Copyright- Legal right granted to a writer for
exclusive publication, production, sale, or distribution
of written work.
Warm up?
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Who determines what businesses produce in a
command and market economy?
Command-government
Market-individuals, us, the consumers
The Free Enterprise System

Voluntary Exchange
 Drives
U.S. Economy
 Individuals & businesses freely choose to exchange
goods/services (voluntary decisions)

Goal of Producers/Consumers
 Producers
want to sell an item for the highest price and
consumers wish to purchase the item for the lowest price
Effects of Free Enterprise System

Private Property
 Factors

of Production are owned by private citizens
Encourages an increase in productivity and
efficiency by producers
 Encourage
 Ex:
innovations and inventions
assembly line & cotton gin
 Specialization/Division
of Labor
Gov’t Role in Free Enterprise System
•
Limited gov’t interaction
–
–
Allows the market to determine
what will be produced and at what
price it sells.
Enforces legal contracts & eco.
regulations
•
Patent
–
•
Guaranteed ownership and control of
an invention.
Copyright
–
Legal right granted to a writer for
exclusive publication, production,
sale, or distribution of written work.
Disadvantages of Free Enterprise
System

Offers less security
 Failed
businesses
 Unemployment, full employment (command economies)
is not guaranteed
 No equity
 People’s
economic status is not determined by the
government but rather how hard they work
 Many different social classes
Closing?

Give one fact that describes each of the 4
economies we have discussed: Traditional,
Command, Market, & Mixed