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3 Basic Questions
Producer
Product
Market
Consumer
What is a definition of each and an
example.
3 Basic Questions
 Each of us play a vital role in the nation’s
economy.
 What role do we play?
 How might the economic decisions of a
mountainous landlocked society differ with
that of an island society?
– What advantage does each have?
– What worries might each have?
– What industries would thrive?
What to Produce?
 What are we going to produce to satisfy our
society’s needs and wants?
 How much of our resources will go towards
defense, consumer goods, housing,
education, etc?
 If we decide to make consumer goods or
housing, what type will we make?
 Each decision that we make comes at an
opportunity cost.
How Should We Produce It?
 Are we going to produce goods and services
with a lot of manpower and little machinery
or vice versa?
 What is the opportunity cost for each in
farming?
Who Consumes Goods and Services?
Benefits Income Distribution
 Who will benefit from
production?
 Benefits depend on how
income is distributed.
 How much should athletes
and entertainers earn
compared to teachers or
firefighters?
 These questions are
answered by each
society’s values and
goals.
Wayne Gretzky’s house, my house
Economic and Social Goals
 Economic efficiency
* Means that resources
are used wisely and
that the benefits
gained are greater
than the costs
incurred.
Economic and Social Goals
 Economic Freedom--The freedom for people to
make their own economic decisions, is a goal
highly valued in the United States.
Economic and Social Goals
 Economic Security--A
social goal that results
in programs to help
support the ill, the
elderly, and workers
who have lost their
jobs.
Economic and Social Goals
 Economic Equity--Social goal that supports laws
against wage and job discrimination
Economic and Social Goals
 Economic Growth-Populations tend to
increase and want
more goods and
services.
 Improved standard of
living for each
generation
Economic Goals Poster
 Choose one of the economic and social
goals.
 Illustrate with images and/or words the
concept or an example of what the goal
represents.
 Include a title, visual representation, and
description of the goal.
 Which Economic goal could help them
recover from the storm?
Efficiency and Security
Free Market
 What comes to mind when you hear
Self Interest?
 Self Interest motivates the marketplace
The Free Market
Markets--Place where
buyers and sellers
exchange goods and
services.
Why Markets Exist
1. Because no one is self-sufficient.
2. Specialization and Division of Labor may
improve productivity. (Interdependence)
3. We buy and sell what we need and what
we have produced.
Free Market Economy
Voluntary Exchange
 Buyers and Sellers are free to decide
whether or not to complete a transaction.
 Both believe that the item received is more
valuable that what is given up.
Types of Voluntary Exchange are:
Habitual, Impulse, and Rational.
Types of Markets
 Factor Market
–Where individuals earn their
income.
–Firms purchase or rent land, they
hire workers and pay them salaries.
Types of Markets
 Product market
 Where producers sell their goods and services to
consumers.
 Money received in the Factor market is then given
back to workers in the product market.
The Free Market Economy
Circular Flow Diagram of a Market Economy
 In a free market economy,
households and business
firms use markets to
exchange money and
products. Households own
the factors of production
and consume goods and
services.
Households pay
firms for goods
and services.
Product market
monetary flow
physical flow
Firms supply
households with
goods and services.
Households
Households supply
firms with land, labor,
and capital.
Firms
physical flow
monetary flow
Factor market
Firms pay
households for land,
labor, and capital.
Self-Regulating Marketplace
 Self Interest--Your
own personal gain
 Competition-struggle among
producers for your
dollars.
 Invisible Hand-Prices set
themselves
How is a Centrally Planned Economy
Organized?
 In this economy, the central government, rather
than individual producers and consumers in
markets answer the key economic questions of
production and consumption
Government control of factor resources
and production
In a centrally planned economy,
the government owns both land
and capital.
The government also controls
where individuals work and what
wages they are paid.
Centrally Planned Economies
Socialism
belief that wealth should
be distributed evenly
throughout a society:
allows for democracy
to help make decisions
Centrally Planned Economies
Communism all economic and political
power rests in the hands of a
central government:
Authoritarian
Strict obedience from their
citizens.
Don’t allow individual
freedom of judgment and
action.
Problems of Centrally Planned Economies
 Poor quality
 Serious shortages of nonpriority goods and services
 Diminishing production
 Discourage innovation or
change
The Former Soviet Union
 Soviet Union rose out
of revolutions in 1917
 Central planning was
introduced during the
1920’s
Soviet Agriculture
 Collectives--Large farms leased to farmers
 Workers were guaranteed employment and
income.
 Few incentives to produce more or better
crops
Soviet Industry
Factories were stated owned
Favored defense, space program
and heavy industry.
Heavy industry is large capital
used to produce items used in
other industries.
Soviet Consumers
 Consumer goods were
scarce and of poor
quality
 Manufacturers
incentives wee on
quantity, not quality.
 Consumers had
difficulty getting goods.
Modern Economies
No one pure economic system
can adequately satisfy everyone’s
wants and needs.
Most modern economies are a
mix of free market and
government intervention
Limits of Economic Systems
 Market: Does not provide public goods.
“Laissez Faire” is not enough. Government
needed to protect property rights.
 Centrally planned: Does not provide
enough consumer products and freedom.
 Traditional: Does not provide opportunity
for potential growth.
Moving to Mixed Economy means
Opportunity Costs
 Gaining more governmental control means
less freedom.
 Less government control means more
freedom, but less social, defensive, etc
government programs.
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Government’s Role in a Mixed Economy
Circular Flow Diagram of a Mixed Economy
In a mixed economy,
 The government
purchases land,
labor, and capital
from households in
the factor market,
and
 Purchases goods
and services in the
product market.
Product market
monetary flow
physical flow
Households
expenditures
Government
physical flow
monetary flow
Factor market
expenditures
Firms
Mixed Economies
 Free Enterprise: System, largely, in which
private ownership dominates. (United
States)
 In Transition: State owned businesses need
to be privatized.. (China)
 Continuum: Range of economic systems
from country to country with no clear
boundary.