Economic Systems

Private Property

- A fear exists that private property leads to consolidation of power, and people with property will take advantage of those without - Therefore... socialists believe it's better if government controlled/owned property

How do markets determine what gets made?

- Billions of interactions between individual people lead to shifts in resources from one product to another. - A producer doesn't need to "know it all"... just react to their consumer's choices. (Ex. TV salesman)

Households

- Buy and consume goods and services - Own and sell FOP

lack of competition

- Competition among both producers and consumers is necessary for markets to function properly - Similar companies might restrict amount of goods in order to raise prices (make more profit; Ex. Exxon and BP) - Justice Department of the US prosecutes such firms

Markets for Goods and Services

- Firms sell - Households buy

Competition

- Less competition among producers, because they are directed by government. - Less incentive to use resources efficiently or to keep costs of production low.

Missing from the Diagram...

- No government - No international trade - No underground economy

income inequality

- People who earn lots vs. who earn little $$$ - High income is an incentive for productive resources - Government provides programs that transfer money from high income to low income people - Ex: unemployment compensation, food stamps

Profit Incentive

- Prices are set by the government - Less profit incentive... more focus on the need to meet government requirements

Firms

- Produce and sell goods and services - Hire and use FOP

Communism

- Under communism, none of the FOPs are owned by individuals... government controls all FOP - All people work together for common good - The goods & services produced are shared out among the people based on their needs, NOT on their contribution to the work - The result, in theory, is a classless society where everything is public property, rather than private - A violent overthrow of capitalism is encouraged

3 basic economic questions

1. What goods and services will be produced? - This question arises because of scarcity; No country can produce all the G&S it wants; Should we produce more? 2. How will G&S be produced? - What resources and/or technology will be used to produce a good?; More or less capital?; Will resources and technology be combined?; Will individuals or government make production decisions?; Edu cations role - ability of workers 3. For whom will the G&S be produced? - Who will receive the G&S?; What method will decide who gets G&S?

____ _____ wrote An Inquiry into the Nature and Causes of the Wealth of Nations.

Adam Smith

Freedom of Enterprise & Choice

Government controls/owns many FOPs... Less freedom of enterprise or choice versus capitalism

Role of Government in the Economy

Government plays a major role in answering the basic questions (what, how, and for whom to produce).

_____ are a signal to move resources elsewhere.

Losses

S & W of a Command Economy

Strengths: - Economic change occurs faster - Belief that government will provide economic security and equity. - Allegedly everyone is provided necessities despite contribution to society (doctor or cashier get the same stuff) Weaknesses: - Planners don't set accurate production goals - Quality & variety of goods suffer... no profit... lack of incentive... only attempt to meet central power's demands - Shortages exist (not enough goods produced)... means long lines, empty shelves, and black markets

S&W of a Traditional Economy

Strengths: - Little conflict among members - Cooperate freely Weaknesses: - Restricts individual initiative which prevents the output of advanced goods, new technology, and economic growth

S & W of a Market Economy

Strengths: - Wide variety of goods - Low prices - Uses scarce resources efficiently Weaknesses: - Market Failures (Lack of competition, income inequality, externalities, public goods) - If there is a demand, there will be a supply, despite negative effects! (ex. drugs) - Lack a moral compass at times (ex. child labor) - Markets produce for those with the money (ex. more medicine is produced for common sicknesses - more money here - versus rare diseases)

Externalities

a cost or benefit imposed on people other than the consumers and producers of a good or service - may be negative or positive (ex. roommate listening to music while you study OR visitors to a nice neighborhood that enjoy the scenery but did none of the work)

public goods

a good or service that has 2 properties: 1. Users collectively consume benefits. 2. There is no way to bar people who do not pay (free riders) from consuming the good or service - Ex. of public goods (traffic lights, Air Traffic Control, NORAD)

What answers the 3 basic economic questions?

an economic system

Socialism

an economic system in which resources (FOP) are primarily owned and/or controlled by government under some system of central planning - Individual control of some FOPs exists - Goods & services are divided based on an individual's contribution to society - Focuses on reform of capitalism through a political process

mixed economy

an economic system that answers the basic questions through a mixture of market, command, & traditional systems - Most countries have mixed economies - Example: In the US many FOPs are owned by individuals, yet government gets involved to prevent market failures.

market economy

an economic system that answers the basic questions using prices determined by the interaction of supply & demand - Adam Smith: free markets are the best way to improve economic performance. - Avoid restrictions: Laissez Faire, "to leave alone" - Ability of people to produce products and trade in free markets creates a nations wealth

The___-___ ___ is a visual model of the economy that shows how dollars and inputs/outputs flow through markets between households and firms - Dollars... income or spending - Inputs... FOPs (raw materials) - Outputs... finished products

circular-flow diagram

People may enter into agreements and _____ with each other.

contracts

Profit is the money left after all the _____ _____ _____ (wages, rents, interest, and taxes) have been paid.

costs of production

Competition forces businesses to use resources _____ as well as keep their _____ of production as low as possible. (separate answers with a comma)

efficiently, cost

third parties

people affected, other than producers or consumers, by side effects of the market

Effective competition means that no single company can affect the _____ of a particular good or service.

price

Capitalism is an economic system in which _____ individuals own the factors of _____. (separate answers with a comma)

private, production

The role of government has changed since the founding of the United States to include federal agencies that _____ various aspects of society.

regulate

Property rights are rights to _____ investment, own productive assets, produce in new ways, and enjoy the benefits of profits.

risk

Competition is a _____ among producers or sellers of similar goods and services to win more business.

rivalry

The government cannot _____ or _____ private property without paying the owner. (separate answers with a comma)

seize, use

Buyers and sellers are guided by their own _____ _____.

self-interest

Individuals work for their own _____ _____ and are guided by an _____ _____ that maximizes efficiency. (separate answers with a comma)

self-interest, "invisible hand"

Material well-being of an individual, group, or nation measured by how well their necessities and luxuries are satisfied.

standard of living

invisible hand

the force that guides consumers and producers to act in their own self-interests, and as a result, serve the best interests of society - Producers compete to make a profit - Consumers compete to find the best goods at the lowest prices

economic system

how a society manages the allocation of scarce resources

Private property is owned by _____ rather than by government

individuals

_____ _____ is a system in which the government minimizes its interference with the economy.

laissez-faire

command economy

a system that answers the basic questions by central authority - Dictator or central planners: make economic decisions (Ex. North Korea, Old Soviet Union) - decide how to run various industries and what production quotas should be met... they act as the businessmen

traditional economy

a system that answers the basic questions the way they always have been answered - Same way of living from generation to generation - No motivation to advance - Operate in primitive/native tribes

Wisely using our limited resources.

economic efficiency

Americans want a fair and just economic system.

economic equity

Allowing each member of society to make choices like owning private property and starting their own business.

economic freedom

Increasing the amounts of goods and services produced over the long term.

economic growth

Protection against risks beyond our control.

economic security

Reducing extreme ups & downs in the standard of living.

economic stability

Free markets allow _____ _____, which enables buyers and sellers to decide what to buy and sell with minimal government intervention.

voluntary exchange

market failure

a situation in which the price system creates a problem for society or fails to achieve society's goals

Markets for Factors of Production

- Households sell - Firms buy