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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. + = 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.