Why do societies develop economic systems?

To organize in order to deal with the economic problem of scarcity (lack of resources)

-To provide for a way to answer the 3 basic economic questions and help them achieve the 5 basic economic goals

What is organization essential to?

The flow of economic activity

What is included in an economic system's functions?

(1) Printing of the money you use

(2) Implementation of systems to protect the value and use of money

(3) Laws made and enforced that make it easier for you to work, spend, and live in your country

(4) Government role in economic system

What do all economic systems need to address?

The three basic economic issues/questions

What are the three basic economic issues/ questions?

(1) What to produce

(2) How to produce

(3) Whom to produce for

What to produce

Since resources are scarce (limited) an economy cannot produce everything and must have a way of determining what goods and services to produce

How to produce

There are a variety of ways to produce the same goods and services so economic systems must have a way to determine the best way to produce goods and services

Whom to produce for

Goods and services are produced for a purpose so economic systems must determine whom goods are going to be produced for

How are decisions to the basic economic questions made?

Economic system itself does not make the decisions but provides the rules and guidelines for the decisions to be made by the key players in the economic system.

Why must economic systems have goals?

So they can progress and achieve.

What are the five basic economic goals that societies strive to achieve?

(1) Efficiency

(2) Equity

(3) Full Employment

(4) Stability

(5) Economic growth

EFFICIENCY

Production of as many goods and services as possible at the lowest cost by producing them in the most efficient way possible.

-Includes the efficient distribution of resources

-Brought about by technology

What is true the more efficient an economy is?

The more efficient it is, the better it will function.

How can economies become more efficient?

Through development of technology.

EQUITY

(fairness) The fair distribution of income and wealth that differs from society to society based on their definition of fair, as well as equal motivation and opportunities for all and the equal treatment of all people

FULL EMPLOYMENT

Every available resource (factor of production-land, labor, capital, entrepreneurship) must be used to produce goods and services

STABILITY

Economy must be stable, established, and enduring so that households and businesses can have faith in the economic system and trust that that it will always be there; achieved by getting rid of large fluctuations of the employment rate, inflation rate and business cycles.

ECONOMIC GROWTH

Progress and development achieved by increasing the ability to produce goods and services.

-Increases the standard of living

-Brought about by development of technology

How can economic growth be achieved?

Through the development of technology

-Allows producers to produce goods faster (more goods) and cheaper so they can be sold at a lower price and are more afforable for consumers. The producers make a higher profit.

-ex automobile industry late 1800's to early 1900's

Why can't societies achieve all of the economic goals at the same time?

The attempt to fulfill one economic goal often leads to the impossibility of achieving another

Examples of trade-offs in economic goals

Equity vs. Efficiency-affirmative action policies provide opportunities for ethnic minorities and more equally distribute income and wealth in the U.S. in an attempt to fulfill the goal of equity. This prevents efficiency because the most efficient workers aren't always being hired (without most efficient workers, aren't able to produce as much goods as possible)

Economic Growth vs. Full Employment-economic growth is achieved through the development of new technology but new technology eliminates jobs and increases the unemployment rate making full employment hard to achieve (i.e. manufacturing industry in the U.S.)

Let's Check Your Mastery

______is progress and development that results in increases in production.

(a) economic growth

(b) basic economic questions

(c) efficiency

(d) full employment

(e) organization

(a) economic growth

Economic growth is an economic goal; it means increasing production.

Let's Check Your Mastery

In order to achieve _____, every available resource in the economy must be used in production.

(a) economic growth

(b) basic economic questions

(c) efficiency

(d) full employment

(e) organization

(d) full employment

Full employment is full use of all resources, including capital, land, and labor.

Let's Check Your Mastery

"What," "How," and "For whom" are the ______.

(a) economic growth

(b) basic economic questions

(c) efficiency

(d) full employment

(e) organization

(b) basic economic questions

These are the questions every economic system must answer.

Let's Check Your Mastery

Economic systems developed in response to the need for _______ in societies, which deals effectively with the problem of scarcity.

(a) economic growth

(b) basic economic questions

(c) efficiency

(d) full employment

(e) organization

(e) organization

Economies need organization in order to face problems and achieve goals (i.e. grocery store example).

Let's Check Your Mastery

If an economy is able to keep production costs down and allocate resources effectively, the economy has achieved the goal of ______.

(a) economic growth

(b) basic economic questions

(c) efficiency

(d) full employment

(e) organization

(c) efficiency

Efficient allocation of resources and the ability to produce goods at a fair price are the goals of economic efficiency.

TRADITIONAL ECONOMY

An economic system that attempts to answer the three basic economic questions through tradition.

Tradition

A custom or belief that is passed down from generation to generation; governs a traditional economy

What are the characteristics of a traditional economy?

-Works well in small, close-knit societies

-Usually found in rural (farm), non-developed areas, technology not developed

-Governed by customs

-Most activities are centered on the family and every task is done the same way it was the generation before

What are examples of traditional economies?

-Sections of the Middle East, Africa and South America

-Feudalism in Medieval Europe

What are the strengths of a traditional economy?

-Full-employment: everyone has a role or duty in the economy and they use all of the resources around them to produce

-Stability: have been around for a long time

-Efficiency: have produced the same way for so long they have perfected their process

What are the weaknesses of a traditional economy?

-Resistance to change

-Economic growth: resistance to change, idea that "tradition dominates" prevents growth, no development of technology, do things the same way as they were done the generation before and do not increase production of goods

-Equity:unequal distribution of income and wealth because of traditional attitudes; no chance to move up or down in society because society is guided by tradition, children are encouraged to follow in their parents' footsteps and have little incentive for advancement in society

COMMAND ECONOMY

(Planned economy) An economy that attempts to answer the three basic economic questions by relying on a central or command authority (usually the government).

What are the characteristics of a command economy?

(1) Central authority (government) dictates the economic behavior of individuals

(2) Public ownership

(3) Economic planning

What does public ownership in a command economy refer to?

-All property is publicly owned; individuals cannot own property

-Factors of production are owned by the government

What does economic planning in a command economy refer to?

-Central authority decides how resources will be used

-Gathers information and develops a plan that includes goals for the economy such as production quotas and then builds factories and employs workers to meet the quotas

-Owns and runs all industry and determines jobs and wages of workers
- Factories are expected to meet quotas
- There is no competiton so government sets the prices of goods and services
- Little freedom because the government makes all economic decisions

What are examples of a command economy?

modern-day Cuba, China and North Korea

What are the strengths of a command economy?

Ability to change relatively quickly: government only has to decide to put the change into action; allows them to achieve economic objectives in a very short period of time, adapts easily to differing needs
 

Full employment: 

-Government assigns jobs to all and everyone that is able is required to work or they are sent to prison

-All resources are at the disposal of the government

Equal distribution of income among the working class because income is distributed by the government

What are the weaknesses of a command economy?

Efficiency:Central authority creates plans based on what they believe will be for the greater good of the country but as a result produces goods people don't want 

Equity:Up to the discretion of a few to decide what is equal for all and people aren't treated equally,everyone does not get the same opportunities and the central authority tends not to make decisions based on what is fair for everyone, can be achieved but is usually not achieved

Economic growth: 
-Workers are motivated to go to work but have no motivation to work hard or develop new products
-Entrepreneurs have no incentives because all profit from industry goes to the government who distributes it to the people 

MARKET ECONOMY

An economy that attempts to answer the three basic economic questions by giving economic freedom to individuals and businesses and letting them make the decisions.

What are the characteristics of a market economy?

(1) Private property and individual freedom

(2) Markets and prices

(3) Competition

(4) Lack of government intervention 

What does private property and individual freedom in a market economy refer to?

-Factors of production are privately owned by individuals

-Individuals make the economic choices: businesses are free to decide what they want to produce and how they want to produce it; consumers are free to decide what they want to buy and how much they want to pay

-Private property rights motivate individuals and businesses to take care of their property, conserve resources, and work to improve the value of their property

What does markets and prices in a market economy refer to?

-Consists of numerous markets that determine how the economy will function

-Voluntary exchange: sellers and buyers exchange products only when they desire to do so, not mandated by government decree

-Prices are determined through the interaction of buyers and sellers: sellers want to produce goods and services at the lowest cost and sell them for as much as possible in order to make a profit, buyers want to buy the highest quality good at the lowest price; competing ideas determine prices

Voluntary exchange

Buyers and sellers exchange goods only when they desire to do so, trade between both parties is voluntary, not mandated by government decree

What does competition in market economy refer to?

-Economic decisions are made by individuals competing to make a profit

-Competition between businesses is the driving force of the economy because businesses are motivated to develop better production methods in order to beat out the competition

What does lack of government intervention in a market economy refer to?

- Resources (factors of production) are owned and controlled by individuals
-No central authority with power over the economy
-Consumer sovereignty: economic power lies within the consumer who determines the goods and services that will be provided by making known exactly what they want
-Laissez-faire or "hands off" economy; government does not interfere in the economy 

Laissez-faire

"Hands off" economy; government implements a hands-off approach and does not interfere with the economy

What are the strengths of a market economy?

Economic growth: competition and individual power give incentives to entrepreneurs to develop new technology and businesses compete to be the most productive which also leads to the development of new technology

Stability:Individuals have faith in the economy because of the economic freedom they are provided; change is made slowly but it is what the people want
Efficiency: Competition encourages businesses to increase production and lower costs
Conservation of scarce resources: Scarce resources will be used conservatively because the scarcest resources will tend to have the highest prices

What are the weaknesses of a market economy?

Full employment: Economic growth leads to a reduction of jobs and an increase in unemployment
Unequal distribution of income
Depletion of natural resources: Individuals are motivated by self-interest, or what will be best for them, not what is good for all or good for the environment; natural resources tend to be used and abused without concern

Does a market economy meet the economic goal of equity?

Seen both ways:

Some say that yes because there is opportunity and motivation for all and it is "fair" because the rich work harder and are more successful thus they deserve more opportunities

Some say no because unequal distribution of income and better opportunities for the rich than the poor

MIXED-MARKET ECONOMY

An economy that attempts to answer the three basic economic questions by giving economic freedom to individuals and businesses and letting them make the decisions, but the government and communal organizations weigh in on economic decisions as well.

What are the characteristics of a mixed-market economy? 

-Combines elements of command, market and traditional economies

-Economic decisions are shared between the government and individuals

-Individuals have economic freedom and ownership of the factors of production, but the government regulates the economy

What are examples of mixed-market economies?

United States: primarily a market economy but has elements of traditional and command economies

How does the U.S. economy act as a traditional economy?

Amish settlements found in several states

How does the U.S. economy act as a market economy?

Entrepreneurs are free to set up and run their businesses according to the demands of the marketplace; can produce almost anything consumers will buy

How does the U.S. economy act as a command economy?

-The U.S. government regulates foreign trade, businesses and money supply.

-Entrepreneurs cannot operate solely based on what will sell and what will make a profit; must also consider government regulations which enforce taxation, environmental controls, and equity in employment.

-Federal Trade Commission (FTC): organization run by the government to protect consumers that enforces federal laws which prevent fraud, deception, and unfair business practices
-U.S. government passes laws to ensure the protection of property rights and fair business practices 

What are the strengths of a mixed-market economy?

Consumers and businesses are protected:

-economy is not governed stricty by self-interest because economic decisions are shared between the government and individuals
-individuals have economic freedom and ownership of the means of production but the government regulates the economy to protect individuals from unfair practices

Stable

Economic growth

What are the weaknesses of a mixed-market economy?

Efficiency: sometimes inefficient because government regulations protecting the environment or fair labor practices can prevent a company from choosing the most efficient means of production; harder to launch and maintain a business because of increased bureaucracy

Full employment
 

Let's Check Your Mastery

My parents are farmers. For as long as I can remember, I have been helping them plow and harvest the fields. We use the secrets of our ancestors to get as much from the land as we can. We then trade what we get from the land with others around us. Our society has worked this way for centuries. I belong to a _______ economy.

traditional

Emphasizes immobility of classes and lack of change.

Let's Check Your Mastery

 I am an owner of a very successful mortgage company. My company provides loans to individuals so they can purchase homes. I work hard so I can make a lot of money and retire early. The government does not interfere, so I am able to make decisions as I see fit. I belong to a ______ economy.

market 

The keys to a market economy are economic freedom, lack of government regulation, and individual ownership of property.

Let's Check Your Mastery

I work for the Federal Trade Commission. I help the government regulate consumer protection laws that make sure the economy runs smoothly. I own a townhouse, and I'm thinking about quitting my job and going on a road trip. I belong to a ____ economy.

mixed-market

This is an example of a mixed-market economy because there is government regulation along with economic freedom.

Let's Check Your Mastery

I work for the government in a factory. I work every day in order to fulfill government quotas. My family lives in a modest apartment provided by the government. I belong to a _______ economy.

command

Under a command economy there is no private ownership; the government owns all of the factors of production.

CAPITALISM

An economic and political system characterized by private ownership of the factors of production, individual freedom, creation of goods and services for a profit, competition and voluntary trade.

ADAM SMITH

A Scottish philosopher during the Enlightenment whose ideas laid the foundation for free-enterprise economies

-published An Inquiry into the Nature and Causes of the Wealth of Nations in 1776

What ideas did Adam Smith believe in?

Capitalism/ market economy

-The interaction of self-interest and competition would provide the best economic world.

-Individuals would always act in their own self-interest-seek out the best for themselves-which would drive them to work hard

-People would make money by providing useful good to consumers and workers who contributed to production would be paid a just wage

-Competition would keep prices low because no one buyer or seller could set prices

-Prices would be set by market forces and only change when market conditions changed

-"Invisible hand"
-Laissez-faire government 

-Free-enterprise

INVISIBLE HAND THEORY

Adam Smith's theory that a person is free to pursue their own self-interest so the economy is then guided, as if by an "invisible hand," to achieve the best for all.

Self interest

Seeking out the best for oneself

LAISSEZ FAIRE

Government takes a "hands off" approach to the economy and does not interfere

Free enterprise

Doctrine that a capitalist economy can regulate itself with minimal government interference.

What is true about true market economies in today's world?

-Governments are afraid of implementing true market economies because they fear leaving the economy alone would lead to disaster.

-Developed mixed-market economies to implement government regulation along with economic freedom and competiton.

What do socialists believe?

A small percentage of the wealthy should not possess the majority of the wealth.

Changes should be made but do not agree on how: some believe change should be gradual, while others believe in full rebellion and revolution.

When did socialism begin?

Impossible to determine because attempts at equal distribution of property and goods have been made since before recorded history.

How and when did modern socialism begin?

Began as a rebellion against capitalism in response to the Industrial Revolution in Europe in the mid 1800's: a large working class was created during the revolution and they began to negotiate for better working conditions and higher living standards

KARL MARX

A German social philosopher who believed in the ideas of socialism and communism and published Das Kapital in 1867

DAS CAPITAL

A book published by Karl Marx in 1867 that pointed out the weaknesses of the capitalistic system

What did Karl Marx believe?

-Capitalism was prone to crisis and was weak

-Theorized that eventually all capitalistic systems would be overthrown and replaced with socialist systems

-Capitalist system creates a class conflict between the workers ("have-nots") and the business owners ("haves"); "have-nots" are neglected and will eventually rebel against the haves

SOCIALISM

A transitional social state between the overthrow of capitalism and the realization of communism.

-A "classless" system because everything is distributed equally to all

-Common ownership-everyone has an ownership in all aspects of society

-Command economy because the government is in charge of the distribution of goods and services

Common ownership

everyone has an ownership in all aspects of society

What are the benefits of a socialist system?

All people are taken care of because everyone is given the same goods and services and is treated equally (in theory)

What were Karl Marx's theories a basis for?

the Bolshevik Revolution led by Lenin in 1917

What is the Bolshevik Revolution?

A group of socialists called the Bolsheviks overthrew the provisional government of Russia with the goal of establishing a classless society and increasing their standard of living

-They organized the secret police to keep strict control over the people and eventually came to own all of the factors of production and  they allocated resources among the people

COMMUNISM

purest form of socialism

What did Marx believe about socialism and communism?

Society would transform from capitalism to socialism, then from socialism to communism

What is the downfall of communism?

Didn't turn out the way Marx predicted: all people do not end up being equal and all of the power and the majority of the money go to government officials

Let's Check Your Mastery

An individual's self-interest is what directs the economy.

(a) Adam Smith

(b) Karl Marx

(a) Adam Smith

Self-interest and competition are the key elements of free-enterprise.

Let's Check Your Mastery

The "have-nots" will eventually overthrow the "haves."

(a) Adam Smith

(b) Karl Marx

(b) Karl Marx

The "have-nots" will then create a socialistic "classless" society.

Let's Check Your Mastery

 A small percentage of the population should not possess the majority of the wealth.

(a) Adam Smith

(b) Karl Marx

(b) Karl Marx

According to Marx, uneven distribution of wealth will lead to class conflict.

Let's Check Your Mastery

If given the opportunity, an economy will be run as if by an invisible hand. The government should use a laissez faire approach when dealing with the economy.

(a) Adam Smith

(b) Karl Marx

(a) Adam Smith

Adam Smith believed in no government interference, which is the definition of a laissez faire economy.