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Answering the Three Economic Questions Economic system – the method used by a society to produce and distribute goods and services To satisfy the needs and wants of the people Nations apply an economic system to their society to address the issue of scarcity ▪ In relation to their resources: Some have less than others ▪ The options available to a given society influence the economic system adopted by that community. *Each society faces three questions about production and consumption that shape their economic freedom and choices: 1. What goods and services should be produced? 2. How should these goods and services be produced? 3. Who consumes these goods and services? What to produce to satisfy a society’s needs & wants How we allocate our resources Each production decision a society makes comes at an opportunity cost Remember: “guns or butter” How much of one good is needed? How do we as a society decide which combination to produce? PPC How can we combine the factors of production to achieve our objective? The answer: It is determined by how societies choose to distribute income. Factor Payments – the income people receive for supplying factors of production, such as land, labor, and capital Income distribution is the key to the major differences between economic systems today Each society has set values and goals that help them collectively agree on their adoption of a particular economic system. Economic Efficiency Making the most of resources Economic Freedom Freedom from government intervention in the production and distribution of goods and services. Economic Security and Predictability Assurance that goods and services will be available, payments will be made on time, and a safety net will protect individuals in times of economic disaster. Economic Equity Fair distribution of wealth Innovation Innovation leads to economic growth, and economic growth leads to a higher standard of living. Other Goals Societies pursue additional goals, such as environmental protection *Accurate assessment of a society’s needs and wants leads to economic efficiency -Maximize use of scarce resources https://www.nationalpriorities.org/budget-basics/federal-budget-101/spending/ Different nations allow different economic freedoms Even the least restrictive governments place some limitations on economic freedom -What are some of the restrictions placed on economic freedom in the United States? -Why do you think the government chooses to use restrictions? Predictability: Feeling that a person can rely on the availability of goods or services when they want or need them Safety Net: Government programs that protect people who are experiencing unfavorable economic conditions Examples: Do you believe in equal pay for equal work? Should society provide for those that are unable or unwilling to provide for themselves? Why or why not? What jobs do you feel are not valued justly in society? Paid too much or too little What types of compensation could rectify the problem? ▪ ▪ https://www.youtube.com/watch?v=QPKKQnijnsM https://www.ted.com/talks/nick_hanauer_beware_fellow_plutocrats_the_pitchforks_are_coming What is his stance on inequality? Does he feel it is a problem in America? Why or why not? What is his prediction if we continue on this path? How does he feel about capitalism? What changes does he suggest? What solutions does he offer? Growth allows for a society to raise its standard of living – level of economic prosperity or quality of life As society evolves, innovation allows us to improve upon our way of life To make life more efficient and equitable http://www.numbeo.com/quality-of-life/rankings_by_country.jsp https://www.ted.com/talks/paul_gilding_the_earth_is_full Subsistence: Supporting oneself at a minimum level *Malthusian Theory: Population tends to increase at a faster rate than its means of subsistence and that unless it is checked by moral restraint or disaster (as disease, famine, or war) widespread poverty and degradation inevitably result Some economic goals can directly or indirectly effect a society’s well-being: Environmental protection Affordable healthcare Education Full employment It is how a society prioritizes these goals that determines its success or failure. https://www.gfmag.com/global-data/non-economic-data/happiest-countries Traditional Economy – an economic system that relies on tradition, customs, or cultural rituals to decide what to produce, how to produce it, and to whom to distribute it. Most follow in their parent’s footsteps Jobs based on gender Community is small in population Work cooperatively Often with extended family unit Agriculture & hunting intrinsic to survival of community Success if they are able to meet their own needs = self-sustaining Slow to adopt new ideas or technology Few mechanisms exists to aid when problems arise, such as natural disasters Lack of access to many goods/services Often have a low standard of living Market is an arrangement that allows buyers and sellers to exchange things As individuals, we can’t provide for every need and want Not self-sustaining We go to market to exchange what we have for what we want Specialization – the concentration of the productive efforts of individuals and firms on a limited number of activities We master certain skills and use them to earn income We then exchange our income in the marketplace for the specialized services/goods of others It leads to efficient use resources – capital, land, and labor It is easier to master one or two tasks than to know a little about everything What would you consider to be your current specialization? Market economy – economic system in which decisions on production and consumption of goods and services are based on voluntary exchange in markets Choices made by individuals Other names for it: Free market Capitalism ▪ The capital that entrepreneurs invest in businesses is a vital art of the system Voluntary exchanges Individuals & businesses Private ownership of the factors of production Answer the 3 main economic questions A system of reciprocity that allows for the exchange of goods and services Household – a person or group of people living in the same residence They own the factors of production – land, labor, & capital Firm – An organization that uses resources to produce a product which it then sells Transforms “inputs” (factors of production) into “outputs” (products) This relationship is known as the factor market Factor market – market in which firms purchase the factors of production from households Workers Wages & Salaries Household purchase the goods and services produced by firms in a product market Goal is profit – the financial gain made in a transaction Adam Smith Scottish Physiocrat Subscribed to the notion of laissez-faire: The govt should keep their “hands-off” of the economy Believed that competition would result in the most prosperous economy In his treatise he discussed how a free market functioned: Self-Interest: Transactions were based on buyer and seller’s own personal gain Determines what is produced in market Incentives: An expectation that encourages people to behave in a certain way Consumer Sovereignty: The power of consumers to decide what gets produced It can be a hope for a reward or a fear of punishment Smith believed people responded predictably to either incentive Firms (manufacturers)have an incentive also – profit To achieve a profit they need to be competitive Competition – the struggle among producers for the dollars of consumers The market selfregulates through selfinterest & competition Supply and Demand Competition creates production and moderates pricing Economists call this the invisible hand Centrally planned economy – an economic system in which the central government makes all decisions on the production and consumption of goods and services No private property ownership No free market pricing No competition No consumer choices Central bureaucracy: Govt controls all factors of production They allocate all factors based on their analysis of a given situation The government owns ALL land & capital Govt controls labor and tells people which industry they will work in and in what capacity Socialism – a social and political philosophy based on the belief that democratic means should be used to evenly distribute wealth throughout a society Term describes a range of econ/political systems Democratic free market but requires central planning Higher taxes to pay for social programs to benefit society To achieve need to have both: Economic equality Political equality Communism – A political system characterized by a centrally planned economy with all economic and political power resting in the hands of the central government Believe violent revolution is needed to attain socialist society Authoritarian – requiring strict obedience to an authority “The history of all hitherto existing society is the history of class struggles.” – Karl Marx *Believed capitalism led to exploitation of workers and unequal distribution of wealth *Next step is a revolution of the lower class Marxian theory looks good on paper The Bolsheviks believe in it and begin a violent revolution to enact it Want power & prestige on the international stage Factories are state-run Focus on arms, space, & heavy industry All required large capital investments Used resources needed for domestic goods Consumer goods – low quality Once quota was hit, no need to continue producing No incentive to be innovative Collectives – large farms leased from the state to groups of peasant farmers Government provides all equipment, seeds, and fertilizer Government determines the daily wage of farmer Farmers managed them BUT government told them what they could grow Guaranteed income & employment BUT government distributes leaving no room for incentives or competition By 1930s the Soviets had problems feeding their people Coercion seemed to be the only means to boost production Ukrainian Holodomor: The Unknown Holocaust https://www.youtube.com/watch?v=M_dnRA5NFhs Goods are scarce – shortages Quality is poor Quantity over Quality No alternatives elsewhere, no choices Access to goods was a problem Gorbachev knew the economy need to be “restructured” – perestroika But many issues arose from the new economic climate he wanted to create Assignment: Read page 37 and answer the two questions on a separate sheet of paper Mixed Economy – an economic system that combines tradition and the free market with limited government involvement. Can you name a nation that employs this? Why do we have mixed economies? Because all economic systems have flaws Limited Laissez-Faire: Government involvement has increased because society has evolved It is easier for govt to help allow for participation by all Protects private property – property owned by individuals/companies, not by the government or the people as a whole Patent law allows for innovation Laws control the growth of monopolies A society must decide how to prioritize each of the six economic goals: How much government control? How much open-market? *Consider the healthcare debate A society must decide what the resulting opportunity cost will be Government collects tax revenue from businesses and individuals Reallocates that capital ($) to: Social welfare programs Research Education Infrastructure improvements Industry improvement or maintenance Retirement – Social Security Would you be willing to pay higher taxes for the following economic goals? Universal Healthcare? Paid sick/maternity leave? Social Security? Safety Net – other social programs? Defense? Scientific research? Education? Transportation infrastructure? Veterans retirement? The U.S. is the clear leader in total annual spending, but ranks 9th in Science performance and 10th in Math. Most Industrialized countries offer a minimum of five days of paid sick leave, and up to 50 paid days for serious illness. The US has no guaranteed paid sick leave. The gas discrepancy is enormous. Some countries, like UK, pay up to $9 per gallon, while others, like Venezuela, have incredibly low gas prices at 9 cents per gallon Mixed economies run a spectrum or continuum – a range with no clear division Varied levels of govt involvement For example: America is a mixed economy based on the notion of free enterprise : Private ownership of capital goods Private investment decisions Decisions are determined in a free market Market Dominated Mixed Economy: Free enterprise dominates BUT there is limited government oversight/regulation Government oversees certain services that are provided to ALL citizens Government helps insure social stability Government intervenes on behalf of free enterprise if their livelihood is threatened (monopolies) Transitional Economies–A period of change in which an economy moves away from a centrally planned economy toward a market-based economy The success of the transition depends on state firms being privatized: selling govt-run firms to individuals This is often a long process and not always successful WHO WAS RELATIVELY SUCCESSFUL? WHO WAS NOT THAT SUCCESSFUL? In Mexico men tend to work up to the last year of their lives whereas women in Austria spend an average of 26 years in retirement.
