Explorations in Economics

Honors Economics – Mrs. Martini

Chapter 2: Comparing Economic Systems-Module 4: Using Resources to Achieve Economic Goals-Module 5: Types of Economic Systems-Module 6: The Modern Market Economy

MODULE 4:Using Resources to Achieve

Economic Goals

KEY IDEA: Every society must determine how to use its resources to achieve its economic goals.

OBJECTIVES: •To explain the three basic economic questions.•To identify five economic goals that societies pursue.•To describe tradeoffs made among the five goals.

THE THREE BASICECONOMIC QUESTIONS

1. What should be produced?

2. How should it be produced?

3. For whom should it be produced?

SOCIETY’S ECONOMIC GOALS

The standard of living is a measure of comfort in terms of the goods and services available.

Economic Goals:•Economic Growth•Efficiency•Equity•Economic Security•Economic Freedom

1. Economic GrowthIncrease in production over time.

No Economics Growth + in Population = Lower Standard of Living

We measure economic growth using GDP

In the U.S. the Service industry tends to have high growth.

2. Efficiency

• Make some people better off without making others worse off

• Don’t allocate resources to products unwanted (Meat in India)

• Distribute goods and services to those who actually want them

• Wasted resources = Inefficiency

3. Equity (Controversial!)

• Production and Distribution should be “fair and just”

• Equality of Outcome – share the production outcome equally

• Equality of Opportunity – everyone should have the same opportunities (i.e. Education, jobs)– Implies choice

4. Economic Security

• Ability to support yourself and your family• Financial issues cause STRESS, DIVORCE,

DEPRESSION!• Availability and quality of jobs• Social Safety Net – gov’t assistance for

financial needs– S.S., Unemployment Insurance, Workers’ Comp

5. Economic Freedom

• Freedom to make choices• What to buy, where to work, where you live

etc.• Sustainability is important – keep this up for

the long haul• Scale of Economic Freeedom

TRADEOFFS AMONG GOALS

Tradeoffs force societies to prioritize among economic goals.

When the gains from change exceed the losses, it is possible to achieve an improved standard of living without neglecting the goals of equity and economic security.

• KEY IDEA: • A country’s economic system determines how well it can

achieve each economic goal.

• OBJECTIVES:• To explain what an economic system is and how

incentives play a role.• To describe the features of a traditional economy, a

command economy, a market economy, and a mixed economy.

MODULE 5: Types of Economic Systems

ECONOMIC SYSTEMS AND INCENTIVES

An economic system is an organizational structure for addressing what, how, and for whom to produce.

An incentive is the prospect of a reward or punishment that influences a decision or motivates greater effort.

Types of Economic Systems• Traditional Economy– centers on families,

clans, or tribes• decisions are based

on customs and beliefs

– Good of the group always comes before individual desires

– Incentive to please

Traditional Economies• Advantages and Disadvantages– Advantages: little disagreement over goals, roles• methods of production, distribution determined by

custom

– Disadvantages: as result of resistance to change, less productive• do not use new methods; people not in jobs they are

best suited for• low productivity results in low standard of living • Little economic freedom, economic growth, and equity

for all

Types of Economic Systems cont.

• Command Economy– (centrally planned economy)

government makes economic decisions• determines what to

produce; how to produce; who gets products

• determines who is employed, work hours, pay scales

– Wants of individual consumers rarely considered

– Government owns means of production: resources and factories

Command Economies• EXAMPLE: Socialism and Communism– Karl Marx influenced some societies to adopt

command economies• socialism—government owns some of the factors of

production• communism—no private property; little political

freedom

– Authoritarian system requires total obedience to government• communism is authoritarian

Command EconomiesIncentives – Gov’t reward or punishment

Do your job well = better stuffDon’t = Demotion or PRISON if you try to go rogue!!

Advantages: Economic Security – guaranteed jobsCan change production rapidly b/c the Gov’t is in charge

Disadvantages: Low standard of living, no private ownership of businesses w/o permissionToo much military productionShortages and RationingLow equality AND…

Unfortunate hairstyles

MARKET ECONOMIES

In a market economy, most key economic decisions are made by business owners and consumers.

In a capitalist system, most resources and businesses are privately owned.

A free- enterprise system is an economic system based on private(individual or business) ownership of resources and voluntary exchange.

Types of Economic Systems cont.

• Market Economy– driven by choices of consumers

and producers• consumers spend money, go

into business, sell their labor as they wish

• producers decide how to use their resources to make the most money

– Consumers, producers benefit each other when they act in self-interest

Fundamentals of a Market Economy• 1: Private Property and Markets• 2:Limited Government Involvement– Laissez faire—government should not interfere in

economy– Capitalism—system having private ownership of

factors of production• says producers will create products consumers demand

– Actual market economies all have some government involvement

Fundamentals of a Market Economy• 3: Voluntary Exchange in Markets– Voluntary exchange—traders believe they get

more than they give up

• 4: Competition and Consumer Sovereignty– Consumer sovereignty—buyers choose products,

control what is produced– Competition controls self-interested behavior• sellers offer low price or high value to please

consumers, make profit

Fundamentals of a Market Economy• 5: Specialization and Markets– Specialization—people concentrate their

efforts in the activities they do best• encourages efficient use of resources• leads to higher-quality, lower-priced

products

Impact of Market Economies

• Advantages– Individuals free to make economic choices, pursue

own work interests– Less government control means political freedom– Locally made decisions mean better use of

resources, productivity– Profit motive ensures resources used efficiently,

rewards hard work• resulting competition leads to higher-quality, more

diverse products

Impact of Market Economies

• Disadvantages– Pure market economy has no way to provide

public goods and services– Does not give security to sick or aged– Businesses did not address problems caused by

industrialization– Industrialized societies adopt some government

control of economy

MIXED ECONOMIES

A mixed economy combines a market economy with significant government involvement and elements of tradition.

Governments in market economies have expanded their roles in the pursuit of equity, economic security, and sustainability.

ECONOMIC SYSTEMS

MODULE 6: The Modern Market Economy

• KEY IDEA: • In modern market economies, government participation

can support market exchanges and improve economic performance.

• OBJECTIVES:• To explain the relationship among households, firms,

and markets in a market economy.• To explain the government’s role in a market economy.• To describe how the government fits into the circular

flow model of the economy.• To describe the tradeoffs different countries make in

designing social safety nets.

A household consists of an individual or a group of people who live together and share income, such as you and your family.

HOUSEHOLDS, FIRMS,AND MARKETS

1. Households purchasegoods and services from businesses.

2. Households provide land, labor, capital, and entrepreneurship (resources) from which goods and services are produced.

HOUSEHOLDS, FIRMS,AND MARKETS

A firm is a privately owned organization that produces goods or services and sells them to others.

THE SIMPLE CIRCULAR FLOW

THE SIMPLE CIRCULAR FLOW

Product markets are where goods and services are exchanged for money.

Factor markets are where resources areexchanged for money.

GOVERNMENT’S ROLEIN A MARKET ECONOMY

1. A government can establish and enforce rules that improve market performance.

2. A government can provide important goods and services that private individuals tend not to purchase.

3. A government can help improve economic security, equity, and sustainability.

GOVERNMENT IN THECIRCULAR FLOW

A public good is a good or service that can be consumed by many people at once and that other people can’t be prevented from using.

Transfer paymentsare expenditures for which the government receives no good, service, or resource in return.

Government in the Circular Flow

INTERNATIONALPERSPECTIVES

Countries have to decide if they want a strong safety net or a weak one.

More public goods and transfer payments tend to increase the tax rate.