Chapter 2Economic Systems

Long Term Objective (LTO)Explain the three economic systems

Slideshow is Online

• MMHS• Teachers• Kraus, Connie• Econ Resources page• Chapter 2 Slideshow

Ch 2, Section 1Short Term Goals (STGs):

1. Identify the three key economic questions that societies/governments face.

2. Describe society values that determine how a country answers the Three Economic Questions.

3. Describe the Three Economic Systems and how they were/are influenced by society.

Three Economic Systems

Economic Systems

Free Market No Gov involvemt in economy. NO Safety Nets.

Mixed Market Government stimulates/regulates economy

Command Economy/Centrally Planned Economy Government controls ALL economic issues.

Continuum (Varying Degrees of Involvement)

Free Market

• NO Government control over prices, interest rates or production. “Invisible Hands”

• NO welfare, food stamps, disability checks…• Business owners & Buyers decide the THREE

ECONOMIC QUESTIONS:1. WHAT to produce2. HOW to produce3. WHO consumes what is produced

Free MarketExamples: Primitive cultures, some 3rd World nations.Explanation: Sellers decide if paint has harmful chemicals. Buyers: Goods & Services are consumed by those who have the $$ for it.

Mixed Market Economies

• Ex: Most nations1. United States2. Mexico3. China4. Russia

Mixed Market Economies

• Most nations’ government get involved in their country’s economy

• Why? – Because society’s values have changed.– Too much poverty can lead to Revolts/overthrow

of government leaders

Command Economies/Centrally Planned Economies

• Government has highest level of control over production and prices than in Mixed Market.

• Usually have a Dictator or Political System with only 1 Political Party-Communist.

• NOT very efficient (except in focus area)• Few choices/less variety• Usually have no:– unemployment– homeless

Centrally Planned Economies

• EX: 1. North Korea2. Cuba3. (less extent) Argentina

How do countries choose which system?

• Depends on the values of their society.• Culture, religion and historical events play a

part.– EX:

1. Some religions believe that you should help the poor.2. Shirtwaist Factory Fire – led to workplace safety rules.

Pg 25, Figure 2.2• Use the explanations in the Economic Goals

table to rate these nations on how well you think they meet those goals.1=Lowest, 3=Average, 5=Hi

United States China Mexico

Efficiency

Economic Freedom

Economic Security/PredictabilityDistribution of Wealth

Growth/Innovation

Environmental Protection

GeneralitiesFree Market Mixed Market Command Economies

No Safety Nets Hi level of consumer protection

Highest level of Gov’t involvement = little product variety.

Lowest standard of living for most of the population.

Product Quality - Hi Usually low quality of consumer goods

Small group of Wealthy have the most power.

Product Safety - Hi Economic Security-HighestNo unemployment/homeless

Very small middle-class. The Market (Buyers & Sellers) decide MOST of the Three Economic Questions, but Gov’t does stimulate the economy & regulates business.

Least innovative.

Quality of Goods/Safety of Goods: Depends on $ and Status of the Buyer.

Highest level of innovation Closest to achieving ONE Economic Class. NO WEALTHY, POOR OR MIDDLE CLASS.

The Market decides ALL of the Three Economic Questions

Economic Predictability Good – SAFETY NETS, but does have UNEMPLOYMT.

Gov’t decides WHO gets WHAT. Reward patriotism & Political Party Officials.

Factor Payments

• What/How you are paid for supplying– Factors of Production:

1. Land – Rent, Lease, Mortgage Payments2. Labor - Wages3. Capital – Pay Interest when you borrow $$

• Entrepreneurs earn PROFITS if the business makes money.

GROUP PROJECT:

• Teams will create a poster on ALL THREE ECONOMIC SYSTEMS (NOT JUST ONE).

• Poster must:– Answer HOW each system handled the 3 economic

questions.– Pros of each system– Cons of each system– Examples of each system (country)

• Cannot be smaller than sheet of construction paper– Suggest using a display board (foam core,…)– Cannot be rolled up.

GROUP PROJECT RUBRIC

• Group Grade: Poster is complete, factual, neatly typed with titles, at least one visual, captions & labels. It must explain, not just list. Ex: Which system is most efficient AND WHY.

• A-Meets all requirements• B-Minor mechanical flaw (Ex: spelling)• C-Missing/incorrect factual info (minor content)• D-Hard to Read/follow. Major content errors.• F-Incomplete

Group Project – Individual Grade

• Each person is REQUIRED TO CONTRIBUTE – even if you’re absent, e-mail your portion to the Team Leader.

• A = did all assigned work correctly and completely by deadline

• B = sloppy• C = minor error/missing work• D – major error/missing work• F – did not meet deadline/did not do the work

Group Project

• Due Friday, September 21st by beginning of class.• Worth 100 points – Group Grade• Worth another 100 points – Individual Grade• Teams: pick a Team Leader who is Organized & Excellent

Attendance. That person will ASSEMBLE every member’s typed contribution. (NOT DO IT for them).

• Divide the work evenly. Confirm what each person must do and when they have to get it to the Team Leader. Ex: Wednesday 7 pm

• Have a Backup Person for each job. So, each person has a Primary Job and a Secondary Job.

Group Project

• Be Problem Solvers• Technical Difficulties are NO excuse.• Don’t wait until the last evening before

deadline to finish. Test out the digital file at least one day before deadline.

• I will be here every day except Tuesday until 3:15 PM to help.

Tuesday – Sub Day

• BE ON YOUR BEST BEHAVIOR• NO PASSES EXCEPT TO THE NURSE (AND ONLY

IF YOU’RE ILL ENOUGH TO GO HOME)• All desks must be put back in rows • The room must be NEAT – No trash or paper

on the floor. • ABSOLUTELY NO FOOD OR DRINKS – NOT

EVEN GATORADE OR POWERADE.

Section 2:STGs

Explain:• Why markets exist• Analyze circular flow model of free market

economy• Understand the self-regulating nature of

the marketplace (“invisible hands”)• Identify the advantages of a free market

economy

A Market

• Why does a Market exist?– Exists because no one can produce all of the goods

and services that he/she needs.

• What is a Market?– Where buyers and sellers exchange goods and/or

services

A Market

• Allows people to specialize in producing goods or services that they are the best at making/providing

Free Market Economy

• The type of economy that was most common centuries ago

• The original type of economic system• See previous slides

Circular Flow Modelof a Free Market Economy

• Pg 30, Figure 2.3• Answer the following questions:1. How does $ flow FROM households to firms?2. How does $ flow FROM firms to households?3. When firms make more $ than expenses, the

firm makes a ______.4. You provide labor and get _____.

Invisible Hands

• Used to explain the efficient, self-regulating nature of the Free Market

• Theory by Adam Smith• Explain how Self-Interest and Competition

make the Free Market work. (Write in pencil in your notebook. We’ll check the answer in 5 minutes. Work with a partner.)

Free Market – Advantages (Pros)

1. Economic Efficiency2. Economic Freedom3. Economic Growth4. Widest Variety of Goods & Services because

firms compete to provide what sells. So, firms specialize to meet their customer’s needs/wants. Customers decide what is produced (buy what they want/do NOT buy other items). This is CONSUMER SOVEREIGNTY.

Ch 2, Section 3Centrally Planned Economies

(Command Economies)

• STGs1. How is it organized?2. Analyze the pros/cons of a Command

Economy.3. Give pros/cons of the former USSR.

Centrally Planned Economies(Command Economies)

• The Government decides the Three Economic Questions

• No Consumer Sovereignty• Usually under an Authoritarian Regime

Socialism and Communism

• Socialism – – May have a Democratic government– Less autocratic than Communism– Still have a High Degree of Government Control

over the economy

Socialism and Communism

• Communism– All ECONOMIC & POLITICAL POWER is held by a

Central Government– Tend to spend more $ on Guns (Capital Goods)

than Free Market and Mixed Market– Little/no incentive for workers to produce more– Can excel in their focus industries: • USSR – steel output, tractors, ballet, symphonies

Ch 2, Section 4Modern Economies

• STGs1. Explain the rise of Mixed Economic Systems2. Interpret a Circular Flow Model of this system3. Compare the countries along the Continuum4. Explain the role of Free Enterprise in the U.S.

economy

The Rise of Mixed Markets

• Economic Systems have evolved from Free Market systems

• All have pros/cons• Most nations are Mixed Markets

Control vs Economic Freedoms

• Nations try to balance their nation’s need for government control and economic freedoms:

• Examples– Safety Nets = more taxes– Less Taxes = Fewer/Less Safety Nets– No homelessness – Govt owns ALL private property– No unemployment – Govt decices who works where– Paying too much for gas, cable, electricity,..?

• Should govt regulate prices?• Should govt own the industries?

Pg 43, Figure 2.5

Continuum of Economic Systems & NationsNOTE: • Hong Kong is less of a Free Market than when this book

was printed.• Hong Kong is a part of China. Since the lease with

Britain ended, China has started to exert more control.• Hong Kong is still less controlled than mainland China.• China has now moved farther away from Centrally

Planned. It is privatizing – factories are now owned by individuals in most industries.

Wrap Up

• Economic Systems are still changing– Based on changing values/demands of its people– Laissez Faire – No govt intervention in the market • Has resulted in many negatives for consumers &

workers• Most profitable (usually) for business• Can restrict growth in some industries

– Ex: India – sewage treatment lacking due to lack of govt intervention

Wrap Up

• Free Enterprise – Allowing people to start and control their own business.– Major Role in U.S. development– Balancing Act:• Allowing enough freedom for businesses while still

protecting workers and consumers• Protecting U.S. businesses (against foreign businesses

who have lower costs) or not.