EconomicsEconomics

Chapter 2Chapter 2

Chapter 2 Section1Chapter 2 Section1

Objectives:Objectives:1.1. How are the three basic economic How are the three basic economic

questions answered in traditional , questions answered in traditional , command, and market economies?command, and market economies?

2.2. What are the roles of self-interest What are the roles of self-interest and incentives in a market economy?and incentives in a market economy?

3.3. What types of mixed economies exist What types of mixed economies exist today?today?

What are the basic economic What are the basic economic questions?questions?

What to produce?What to produce? How to produce it?How to produce it? For whom to produce?For whom to produce?

Types of Economic SystemsTypes of Economic Systems

Four types of economic systems:Four types of economic systems:

1.1. TraditionalTraditional

2.2. CommandCommand

3.3. MarketMarket

4.4. MixedMixed

Types of Economic SystemsTypes of Economic Systems

TraditionalTraditional (Aborigines, Eskimos) Found in (Aborigines, Eskimos) Found in the past.the past.

What to produce-What to produce-In a traditional economy, In a traditional economy, this is determined by tradition. Economic this is determined by tradition. Economic roles are passed down from parents. roles are passed down from parents. Fathers to sons, mothers to daughters.Fathers to sons, mothers to daughters.

How to produceHow to produce-This is determined by -This is determined by custom. When the leaves fall, we harvest.custom. When the leaves fall, we harvest.

For whom to produceFor whom to produce-Usually centered -Usually centered around traditional family and its tribe. Not around traditional family and its tribe. Not global. global.

Types of Economic SystemsTypes of Economic Systems

CommandCommand (Middle Ages) (Middle Ages) What to produce, how to produce, and for What to produce, how to produce, and for

whom to producewhom to produce-all determined by -all determined by government officials. government officials.

Officials are called central planners.Officials are called central planners. What are the advantages and What are the advantages and

disadvantages?disadvantages? Individuals have no say in this type of Individuals have no say in this type of

economy.economy.

Types of Economic SystemsTypes of Economic Systems

Market EconomiesMarket Economies-United States, Canada, -United States, Canada, Australia.Australia.

What to produce, how to produce, and for What to produce, how to produce, and for whom to produce-all determined by whom to produce-all determined by individuals.individuals.

People can buy, sell, and produce anything People can buy, sell, and produce anything they want.they want.

Is that true?Is that true? No, what really controls what is sold, bought, No, what really controls what is sold, bought,

and produced is the market.and produced is the market. MarketMarket-free exchange of goods and services.-free exchange of goods and services.

Market Economies Market Economies ContinuedContinued

How does the market regulate How does the market regulate economic activity?economic activity?

Adam Smith said that the Adam Smith said that the Invisible Invisible HandHand, or self interest regulates the , or self interest regulates the economy.economy.

Self interest-Impulse that encourages Self interest-Impulse that encourages people to satisfy their needs and people to satisfy their needs and wants. wants.

Market Economies Market Economies ContinuedContinued

Government interaction can hurt the economy Government interaction can hurt the economy when it places limits on production or taxes goods. when it places limits on production or taxes goods.

Example: Pizza delivery.Example: Pizza delivery. Why take the job? Benefit to you?Why take the job? Benefit to you? Benefit to other people?Benefit to other people? What happens when limits are placed on pizza What happens when limits are placed on pizza

production?production?-Less tips because less people are eating.-Less tips because less people are eating.

How do you decide what is in your self interest?How do you decide what is in your self interest?-You respond to incentives: rewards or -You respond to incentives: rewards or punishments that affect behavior. punishments that affect behavior.

Example: Commission quotas in retail jobs.Example: Commission quotas in retail jobs.

Type of Economic SystemsType of Economic Systems

Mixed Economy-Mixed Economy-combines elements of traditional, market, and combines elements of traditional, market, and command economic models to answer the three basic economic command economic models to answer the three basic economic questions. questions.

Three main categories of mixed economies:Three main categories of mixed economies:1.1. Communism (authoritative socialism)-Limits on amount of Communism (authoritative socialism)-Limits on amount of

resources that can be used. Example-limit on the amount of resources that can be used. Example-limit on the amount of trees that can be cut downtrees that can be cut down

2.2. Capitalism-Closest to a market economy. Individuals still make Capitalism-Closest to a market economy. Individuals still make all the decisions, but there is some government interaction-all the decisions, but there is some government interaction-taxes, safety regulations. taxes, safety regulations.

3.3. Democratic Socialism-fits between communist and capitalist. Democratic Socialism-fits between communist and capitalist. Government may own some factors of production, key industries Government may own some factors of production, key industries such as different utilities. such as different utilities. -Good or bad? Type of economic system for many European -Good or bad? Type of economic system for many European countries. countries.

Which one would you want to live in?Which one would you want to live in?

Chapter 2 Section 2Chapter 2 Section 2

Objectives:Objectives:

1.1. What are the basic principles of free What are the basic principles of free enterprise in the United States?enterprise in the United States?

2.2. What are the two markets of the What are the two markets of the circular flow model?circular flow model?

3.3. How does the circular flow model How does the circular flow model reflect exchange?reflect exchange?

Features of the U.S. Features of the U.S. EconomyEconomy

What type of economy does the U.S. What type of economy does the U.S. have?have?

The United States has a free The United States has a free enterprise system.enterprise system.

Free enterprise systemFree enterprise system-system under -system under which business can be conducted which business can be conducted freely with little government freely with little government intervention. intervention.

Features of the Free Enterprise Features of the Free Enterprise SystemSystem

Five Main Features of the Free Enterprise Five Main Features of the Free Enterprise System that Individuals have a Right to:System that Individuals have a Right to:

1. Own private property and enter into 1. Own private property and enter into contracts.contracts.

-What is private property?-What is private property?

-Example: Cars, houses, toys, ideas.-Example: Cars, houses, toys, ideas.

-Contracts can be verbal or written. Both -Contracts can be verbal or written. Both are legally binding.are legally binding.

-Example: bills, buying cars, cell phones.-Example: bills, buying cars, cell phones.

Features of the Free Enterprise Features of the Free Enterprise SystemSystem

2. Make individual choices-sell property, 2. Make individual choices-sell property, pursue jobs, make what you want, buy what pursue jobs, make what you want, buy what you want. you want.

-Choices always have consequences.-Choices always have consequences.

3. Engage in economic competition.3. Engage in economic competition.

-Competition: the economic rivalry that -Competition: the economic rivalry that exists among businesses selling the same exists among businesses selling the same or similar products.or similar products.

-Why is competition important?-Why is competition important?

Features of the Free Enterprise Features of the Free Enterprise SystemSystem

4. Make decisions based on self-interest: 4. Make decisions based on self-interest: Voluntary exchange. Voluntary exchange. -Remember, trade makes everyone -Remember, trade makes everyone better off. better off.

5. Participate in the economy with limited 5. Participate in the economy with limited government involvement and regulation.government involvement and regulation.-Safety hazards, restrict discrimination, -Safety hazards, restrict discrimination, provides public services through provides public services through taxation.taxation.

Economic Actors in a Free Economic Actors in a Free Enterprise SystemEnterprise System

Three economic actors in a free Three economic actors in a free enterprise system:enterprise system:

1.1. Consumers-decide what to buy.Consumers-decide what to buy.

2.2. Producers-decide what to sell.Producers-decide what to sell.

3.3. Government-regulates trade between Government-regulates trade between consumers and producers. consumers and producers.

Economic Model: Circular Flow DiagramEconomic Model: Circular Flow Diagram

Chapter 2 Section 3Chapter 2 Section 3

Objectives:Objectives:

1.1. How do nations decide how to use How do nations decide how to use scarce resources?scarce resources?

2.2. What are the major goals of the U.S. What are the major goals of the U.S. economic policy?economic policy?

3.3. Why do economic goals sometimes Why do economic goals sometimes conflict?conflict?

Using ResourcesUsing Resources

How does a nation decide how to use How does a nation decide how to use economic resources?economic resources?

Representatives serve as Representatives serve as policymakers and choose how to use policymakers and choose how to use scarce resources by setting goals. scarce resources by setting goals.

U.S. Economic GoalsU.S. Economic Goals

Six Economic Goals of the United Six Economic Goals of the United States:States:

1.1. FreedomFreedom

2.2. Efficiency Efficiency

3.3. EquityEquity

4.4. SecuritySecurity

5.5. StabilityStability

6.6. GrowthGrowth

U.S. Economic GoalsU.S. Economic Goals

FreedomFreedom-Free to make economic choices, spend -Free to make economic choices, spend money, job choice, save or invest money.money, job choice, save or invest money.

EfficiencyEfficiency-Government tries to get the most out -Government tries to get the most out of its resources to help the economy. of its resources to help the economy.

EquityEquity-This is sometimes called economic -This is sometimes called economic justice. Government tries to make sure everyone justice. Government tries to make sure everyone shares the costs and benefits of the free shares the costs and benefits of the free enterprise system. Mainly done through paying enterprise system. Mainly done through paying taxes that support government services. taxes that support government services.

U.S. Economic GoalsU.S. Economic Goals

Security-This is a nation’s effort to Security-This is a nation’s effort to protect its members from poverty, protect its members from poverty, business and bank failures, and business and bank failures, and medical emergencies-anything that medical emergencies-anything that could harm the economic well being could harm the economic well being of the individual or nation. of the individual or nation.

-Examples: FDIC, insurance, and -Examples: FDIC, insurance, and unemployment benefitsunemployment benefits

U.S. Economic GoalsU.S. Economic Goals

StabilityStability-The United States has two goals for -The United States has two goals for stability:stability:

1.1. To have full employmentTo have full employment-meaning that we will -meaning that we will have the lowest possible unemployment in the have the lowest possible unemployment in the economy. There will always be some economy. There will always be some unemployment because people are always unemployment because people are always changing jobs or getting laid off. changing jobs or getting laid off.

2.2. Price stabilityPrice stability-U.S. tries to keep the overall prices -U.S. tries to keep the overall prices of the economy stable. Attempt to balance of the economy stable. Attempt to balance overall prices of the economy to keep them not overall prices of the economy to keep them not too high or low. This does not mean the too high or low. This does not mean the government does this with individual prices. government does this with individual prices.

U.S Economic GoalsU.S Economic Goals

Economic GrowthEconomic Growth-Government tries -Government tries to increase production for each to increase production for each worker. An increase in production of worker. An increase in production of goods and services will increase the goods and services will increase the overall standard of living for the U.S.overall standard of living for the U.S.

Key PointsKey Points

Government must assign priorities to try Government must assign priorities to try and figure out what goals are most and figure out what goals are most important. We do the same in our own lives. important. We do the same in our own lives.

Priorities can change over time. Priorities can change over time. Priorities can conflict-people have different Priorities can conflict-people have different

opinions on what should be a priority. opinions on what should be a priority. Sometimes solutions can conflict. Even if we Sometimes solutions can conflict. Even if we

agree on what should be a priority, we can agree on what should be a priority, we can disagree on how that goal should be disagree on how that goal should be achieved. achieved.