Chapter 2 Economic Systems

Transcription

1 Chapter 2 Economic Systems

2 Section 1 Answering the 3 Economic Questions Objectives 1. Identify the 3 key economic questions that all societies must answer 2. Analyze the economic goals and societal values that determine how a country answers the 3 economic questions 3. Define a traditional economy Could you live in a society that had only 1 brand of soda, or ice cream, or cereal, etc.?

3 Discussion Questions 1. Should the government try to influence the types of crops farmers grow or the types of animals they raise? 2. Should producers be allowed to produce any kind of food they choose? 3. Should fats or calorie content or the use of chemical additives in food be regulated? 4. Should food be made available to people who can t afford to buy it and, if so, how? Societies around the world differ in how they answer to the above questions.

4 The 3 Basic Economic Questions (Q s) Resources are limited (scarcity exists) Every society has to answer the following Q s: 1. What Goods and Services Should Be Produced? 2. How Should Goods and Services be Produced? 3. Who Consumes Goods and Services? The way society answers the 3 Q s defines its economic system the structure of methods and principles a society uses to produce and distribute goods and services

5 Q1: What Goods and Services Should Be Produced? How much of our resources should be devoted to defense, education, health care, consumer goods, etc.? What is Consumer Sovereignty and how does it impact what will be produced? What happens if businesses fail to match their production choices with consumer choices?

6 McDonald s items added by year Hulaburger (1962) Filet-O-Fish (1963) Strawberry Shortcake (1966) Bic Mac (1968) Hot Apple Pie (1968) Egg McMuffin (1975) Drive-thru (1975) Chicken McNuggets (1983) Extra Value Meal (1991) McLean Deluxe (1991) Arch Deluxe (1996) 55-cent Special (1997) Big Xtra (1999) McSalad Shaker (2000) McGriddle (2003) Snack Wrap (2006)

7 Q2: How Should Goods and Services be Produced? How are the factors of production combined to produce goods? What combinations of resources and technologies will be used? What is the most efficient way to minimize cost per unit? What effect does inefficiency have on costs? What are profits? How are they determined?

8 Q3: Who Consumes Goods and Services? Who can afford to buy? How can people meet their needs for basic necessities or medical care? Who gets access to a college education? How do people or households earn income? Factor Payments: Income people receive from supplying factors of production How do prices impact consumption?

9 Section 1 Notes Question 1 What are the 3 basic economic questions that society must answer?

10 Economic Goals and Societal Values There are 5 basic economic goals: Economic Efficiency Economic Freedom Economic Security Economic Equity Economic Growth Can all 5 goals be achieved in every society? What happens when the goals conflict?

11 Economic Efficiency Maximize production using available resources Requires assessing what people need and want Reducing waste, utilizing technology Goal: to deliver the right goods in the right quantity to the right people at the right price

12 Economic Freedom Opportunity to make choices Freedoms: To buy what we can pay for To seek work where we want to work To own property and other goods To become entrepreneurs

13 Economic Security Everyone values basic security Knowing products will be available when we want to buy them Knowing we will receive our paycheck on payday We also want to know that help is available if needed Governments provide a safety net programs to protect people who face hardships From layoffs, injuries, natural disasters Base income for retirees (social security)

14 Economic Equity Equity = Fairness = Equality How should economic resources be divided? Should resources be divided equally? Should they be earned? Are the rich responsible for the poor?

15 Economic Inequality? The 85 Richest People In The World Have As Much Wealth As The 3.5 Billion Poorest The report Working for the Few (Jan 2014) states: Almost half of the world s wealth is now owned by just 1% of the population. 7 out of 10 people live in countries where economic inequality has increased in the last 30 years. In the US, the wealthiest 1% captured 95 % of post-financial crisis growth since 2009, while the bottom 90% became poorer. What can be done? What should be done?

16 Economic Growth Need growth to provide employment opportunities (jobs) for new workers Need growth for people to have more income (to improve the standard of living) Requires innovation new methods, products, ideas How does innovation lead to growth and ultimately benefit your generation?

17 Goals in Conflict Other goals Environmental protection Full employment Protecting certain large industries (automakers, banks) Goals may conflict Healthcare for all cost may slow economic growth Regulations on the environment may hinder economic freedom & growth Conflicts require nations to prioritize Results in trade-offs

18 Section 1 Notes Question 2 What are the 5 basic economic goals of an society? List and briefly describe each.

19 Section 1 Notes Question 3 What is a traditional economy?

20 Traditional Economies An economy that relies on habit, custom, or ritual to answer the 3 economic Q s Revolves around family unit Boys tend to do same work as their fathers (girls as their mothers) Communities tend to stay small and close Agriculture and hunting practices Have limited access to goods, lack modern conveniences, low standard of living

21 Assignments Chapter 2 Packet (White) Complete the Section 1 Assessment Questions on page 4 Critical Thinking items - # s 9, 10, 11, &12 Worksheet Packet (Green) Complete page 13

22 Free Market vs. Centrally Planned Work with a Partner Complete page 2 in your Notes Packet One person completes the Free Market column Use pages 29 to 34 in the textbook The other person completes the Centrally Planned column Use pages 35 to 38 in the textbook Share results

23 Section 2 The Free Market Objectives 1. Explain why markets exist 2. Describe the main characteristics of a free market system 3. Describe the self-regulating nature of the marketplace 4. Identify the advantages of a free market economy

24 Why Markets Exist Why do markets exist? What purpose do they serve? They bring buyers and sellers together to exchange things What are some examples of markets? Stock market Job market Farmer s market Retail stores and other shops Online shopping Housing market

25 Characteristics of the Market System Property Rights (encourage investment, innovation, maintenance, etc.) Freedom of Enterprise and Choice Self-interest (motivates the various economic units) Competition (diffuses economic power) Markets and Prices (supply and demand) Use of Money (medium of exchange) Technological Advancement (efficiency/growth) Specialization (increases total output from limited resources)

26 Free Market Economy Households and Firms Households (consumers) Sell factors of production Buy goods and services Firms (businesses) Buy resources (factors of production Sell goods and services Factor and Product Markets Factor market Resources are sold Firms purchase (land, labor, capital) from households Product market Goods and services are sold Households purchase from firms

27 The Self-Regulating Nature of the Marketplace Self-Interest Adam Smith 18 th century philosopher Observed that an economy is made up of countless transactions Both the buyer and the seller consider only their personal gain (self-interest) Self-interest is the motivating factor in the marketplace

28 The Self-Regulating Nature of the Marketplace Competition Struggle among producers to get consumers Adam Smith Consumers buy more if lower price (price drops) Firms seek to make more profit with increased sales More manufacturers or sellers of product keeps prices in check for consumers Incentive hope of reward or fear of penalty results in an action Examples: Higher pay (individuals), more profits (business) Prestige, personal satisfaction

29 The Self-Regulating Nature of the Marketplace The Invisible Hand Self-interest and competition work to regulate the economy Requires no central planning or direction (no Government necessary) Invisible Hand the self-regulating force of the market

30 Advantages of the Free Market Economic efficiency Lack of regulation improves efficiency Economic freedom Highest degree of freedom (government not involved) Economic growth Innovation is encouraged by competition Growth is the result of innovation Additional goals Offer wide variety of goods and services Producers have incentive to meet needs of consumers Consumers ultimately decide what gets produced consumer sovereignty ( the customer is king )

31 Assignments Chapter 2 Packet (White) Complete the Section 2 Assessment Questions on page 5 Critical Thinking items - # s 7,8 9, & 10 Worksheet Packet (Green) Complete page 14

32 Section 3 Centrally Planned Economies Objectives 1. Describe how centrally planned economy is organized 2. Distinguish between socialism and communism 3. Analyze the use of central planning in the Soviet Union and China 4. Identify the disadvantages of a centrally planned economy What are the characteristics of a centrally planned economy?

33 How Central Planning Works Government answers the 3 economic Q s Government owns the land and capital It controls the labor determines where people work and their pay Central Planned Economies = Command Economies Opposite of Free Market Self-interest and competition don t exist as in free market No consumer sovereignty

34 Socialism and Communism Socialism Involves central planning and government control Not run by Authoritarian Government Represents a range of economic & political systems Belief: wealth should be evenly distributed throughout society (Economic Equity) Market Socialism socialism exists with free market practices Government redistributes wealth and extensive services through taxation

35 Socialism and Communism Communism Government owns and controls all factors of production and makes all economic decisions Karl Marx, German philosopher, opposed the free market concept of Adam Smith Run by dictators Have Authoritarian governments limit freedoms and require strict obedience of all citizens Most economic goals lacking

36 Two Communist Economies China Up to late 1970s government planners controlled everything They allowed some private farmland to exist Small factories built by government to produce goods Goods were expensive and of very poor quality Changed philosophies in the 1970s Gave farmers chance to own more land Offered bonuses to factory managers for making better products China s economic transition Chinese government still owns firms in major industries Government planners control many key economic decisions Entrepreneurs now exist; increased foreign investment China s economy has grown significantly as a result

37 Two Communist Economies The Soviet Union (now Russia) 1917 government was toppled by revolutionaries (1 st communist state) 1928 Joseph Stalin was the Soviet leader Soviet leaders intent was to build national power & prestige Allocated resources to the military and heavy industry (chemicals, steel, etc.) Had harsh (negative) effect on consumer goods and agriculture Eventually the economic weaknesses led to the fall of communism 1991 Soviet Union was broken up (now Russia) Has moved from a centrally planned economy to a more marketbased and globally integrated economy

38 Disadvantages of Centrally Planned Economies Have trouble meeting the goals Economic efficiency - no Government control, large bureaucracy, expensive to run, lacks flexibility Economic freedom - no Discourages competition, takes away choices from producers and consumers Economic growth - no No reward for innovation, change is discouraged, no profit incentive Economic equity - yes Goal is to increase equity, but usual result in an upper class and a lower class (very poor) Additional goals some success Guarantees jobs & income Can promote some industries (government chosen)

39 Assignments Chapter 2 Packet (White) Complete the Section 3 Assessment Questions on pages 5 & 6 Critical Thinking items - # s 7,8 9 Math Skills - # 10 Stock Market Review results, buy stocks, etc.

40 Section 4 Mixed Economies Objectives 1. Explain the rise of mixed economies 2. Compare mixed economies between centrally planned and free market 3. Describe the role of free enterprise in the U.S. Why do most economies today blend a market system with elements of central planning?

41 The Rise of Mixed Economies Every economic system has problems! Reasons for Government Involvement Early free market supporters favored laissez faire (no government involvement) The Invisible Hand Over time, government involvement has increased Some needs are difficult to meet in marketplace (roads, defense) Government supplies some needs to benefit all (public schools) To protect private property and property rights To ensure that exchanges in the marketplace are fair Today, most modern economies are mixed (marketbased system with some government involvement the degree varies by nation)

42 Government Involvement Purchases labor government employs millions of employees Purchases goods and services from firms (defense contracts) Provide goods and services using the factor resources they purchased (to build roads, etc.) Collect taxes from households and firms Transfers some of the $ to individuals and firms To bailout failing industries To pay disabled or unemployed workers or retired workers Regulate business activity

43 Mixed Economies Dominate Government Intervention North Korea Economy dominated by the government (far extreme) Owns all property & economic output 95% of goods produced by state-owned industries Imports banned Foreign production forbidden China Once government dominated, but has changed to allow private ownership of firms and farms Period of economic transition Privatization of state-run businesses process of selling businesses or services offered by government to individual investors, and allowing them to compete in the marketplace

44 Mixed Economies Dominate Government Intervention The Soviet Union (now Russia) 1917 government was toppled by revolutionaries (1 st communist state) 1928 Joseph Stalin was the Soviet leader Soviet leaders intent was to build national power and prestige Allocated resources to the military and certain industries (chemicals, steel, etc.) Had harsh (negative) effect on consumer goods and agriculture Eventually the economic weaknesses led to the fall of communism 1991 Soviet Union was broken up (now Russia) Has moved from a centrally planned economy to a more market-based and globally integrated economy

45 Mixed Economies Dominate Free Market System Hong Kong one of the freest markets Once under British control, now a region of China Continues to operate largely under a free economic system Private sector rules Government protects private property Government rarely interferes in business activity, except Establishing wage controls Price controls on rent and other public services Receptive to foreign investment No barriers on foreign trade Banking system operated independently

46 The U.S. Economy Mixed, but foundation is a free market Free enterprise system private ownership of capital goods Economic Freedom High level Limited restrictions Foreign investment is encouraged Government Intervention Regulates marketplace to limited degree Federal and state laws protect private property Provides many services Promotes the general welfare