Vocabulary

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

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. ProductivityB. InvestmentC. Capital goodD. Diminishing returns

2. 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. An example of improved trainingB. An example of diminishing returnsC. An example of capital goodsD. 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

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, Cuba, North Korea

The 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. Competition must exist2. Private Property3. 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

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?

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

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

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

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?

What economy did the new grading policy (from yesterday) most resemble?

Activity Time!

Put on your creative hats for Ms. Earnest! I hope you like to draw cartoons!

Vocabulary

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?

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 innovations and inventions

Ex: 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