Download Economic Systems

Vocabulary
• Adam Smith- Father of capitalism. He argued his beliefs in his book
“The Wealth of Nations”
• Karl Marx- Father of communism. Advocated the violent
revolution of the working class. He argued his beliefs in his book
“The Communist Manifesto”.
• Laissez-faire- French term meaning “hands off”. It refers that an
economy functions best when the gov’t stays out of it.
• Consumer Sovereignty- Means the consumer is the “King” of the
market and ultimately decides what is produced.
• Keynesian Theory- Advocated by John Maynard Keyes, he believed
the gov’t should decrease taxes and increase gov’t spending.
Could lead to massive debt!
Warm Up
• Why do people and businesses make
investments?
• Why would a business invest in capital goods?
• What are examples of investing in Human
capital?
• Why would employers invest in their workers
education level?
• What do businesses use to figure out how
much to invest?
• How do producers find the opportunity cost of
investment?
Warm Up
• How do businesses determine what to
produce in our economy?
1. Resources that could be used for a greater benefit at a
later time is called what?
A.
B.
C.
D.
Productivity
Investment
Capital good
Diminishing returns
2. In order to increase production and profits, Mark
invests thousands of dollars in a new machine that
assembles lawn mower engines for his company. The
machine which Mark has purchased is what?
A.
B.
C.
D.
An example of improved training
An example of diminishing returns
An example of capital goods
An example of recycling
Economic Systems
Traditional Economy
• Produce what has been
produced in the past.
• Laborers produce just what
they need to survive.
– Have little opportunity for
economic advancement.
• A small wealthy class
controls the factors of
production.
• Not common today.
Communist-Command Economy
• Karl Marx wrote The Communist
Manifesto in which he believed
the working class would rise up
and establish socialism.
– When gov’t controls all capital and
owns all property.
• Communism
– When resources are owned by
everyone, gov’ts ultimately
disappear, and income is
distributed according to need
rather than production.
• No country has ever
developed true
communism
– China, Cuba, North
Korea
• The governments of these
countries control the
economy through socialist
principles
• Fails time & time again
Command Economy
• Gov’t ownership of the factors of
production.
– Gov’t determines what is produced,
how much it costs, and how it will
be distributed.
• Distribution is based on equity (In
Theory).
• Equally among citizens
• Laborers do not have a say their jobs or
working conditions.
• Proven to be failures
•
•
Productivity is based on a sense of duty not
financial gain
Less efficient than market economies
Southeast Asia
Market Economy
• Market economy
– Producers are free to produce what
they choose and consumers are free
to consume what they choose to
consume.
• Profit motive
– Incentive to produce what
consumers want b/c they will make
money.
• Consumer sovereignty
– Producers will decide what to
produce based on how much
consumers demand the product.
Adam Smith & Market Economy
• Wealth of Nations
– States that the market is led by
incentives.
• “Invisible Hand”
– Competition
– Private property
– Free enterprise
• Freedom to buy/sell what one
wishes
• Capitalism
– Factors of production are
privately owned
– Producers decide what to
produce based on what we
demand
– Producers are therefore
motivated to make the best
product
Laissez-faire
• Since the U.S. gov’t limits free
enterprise, it is not a perfect
market economy.
– Minimum wage
– We are known to have a mixed
economy
• Laissez-fair
– “Hands off”
– The gov’t should stay out of the
economy.
Mixed Economies
• Combine market and
command together
• Most countries have this
(USA)
– Countries differ in which
economy they most
resemble
– The U.S. is closest to a free
market society
Keynesian Theory
• Deficit spending
– Belief the gov’t should
increase spending and
decrease taxes.
– When the gov’t spends
more money than it has.
Which Economy is it?
• State planners in Equalia meet to decide what the country
should focus on producing. After deliberating they decided
to use their limited resources to produce automobiles instead
of other consumer goods, such as electronics and clothes.
The state planners passed down their decision to factories,
and allocated to them the raw materials, workers, and other
resources needed to produce automobiles. Factories were
then told how much to produce and who the products should
be shipped to.
• Command Economy
• In Petoria, business owners decide what to produce, how
much to produce, for who to produce. The CEO of Crazy
Eddie’s recently decided to increase production levels of the
company’s newest MP3 player model, and at the same time
decrease production levels of their most popular CD player.
The reason for the emphasis on MP3 players is that demand
for CD players has decreased dramatically as MP3 technology
has taken over the market. Simply put there is more profit to
be made in the MP3 market.
• Market
• In Hooville, people rarely engage in market transactions. For
the most part, they do not need to. Families grow their own
vegetables and raise their own animals or hunt to get meat.
Certain times get tough for people in Hooville, like when the
winters are particularly cold or animals change their
migration patterns. For this reason, it is important that
families stock up in “good times” and develop relationships
with neighbors with whom they can share and trade.
• Traditional
 In Springfield, business owners make most economic
decisions. As long as they can abide by fair trade policies,
they can decide what to produce, how to produce, and for
whom to produce without government intervention. These
decisions are made by business owners based on what
happens in the market. For example, a computer
manufacturer recently developed a new video gaming
system, but decided not to release the system to the public
until it was closer to the holidays because it believed
anticipation among customers would allow the company to
charge a higher price for the system.
 Mixed Economy
Free Enterprise System
• Voluntary Exchange
– Individuals and businesses
freely choose to exchange
goods for something else of
value.
• The goal of consumers is to
buy the goods they want/need
at as low a cost as possible.
• The goal of producers is to sell
the goods they produce as
high a price as possible.
Effects of Free Enterprise System
• Private Property
– Factors of Production are
owned by private citizens
• Encourages an increase in
productivity and efficiency by
producers
– Encourage innovations and
inventions
• Ex: assembly line & cotton
gin
– Specialization/Division of
Labor
Gov’t Role in Free Enterprise System
• Limited gov’t interaction
– Allows the market to determine
what will be produced and at
what price it sells.
• Patent
– Guaranteed ownership and
control of an invention.
• Copyright
– Legal right granted to a writer for
exclusive publication, production,
sale, or distribution of written
work.
Disadvantages of Free Enterprise
System
• Offers less security
– Failed businesses
– Unemployment, full
employment (command
economies) is not
guaranteed
– No equity
• People’s economic status
is not determined by the
government but rather
how hard they work
• Many different social
classes
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reflection
How would you describe a traditional economy?
How do producers decide what to produce in a market economy?
Who is considered the father of capitalism? What book did he write?
What does Adam Smith refer to as the “invisible hand?
Under capitalism, who owns the factors of production?
What id the goal of producers and individuals in a free enterprise system?
How does competition affect the free enterprise system?
What are disadvantages of the free enterprise system?
Who is considered the father of communism? What pamphlet did he
write?
What type of economy goes along with communism?
Who controls the factors of production in a command economy?
What is the goals of communism (command economy?)
What type of economy does the USA have?
Summarize the Keynesian Theory.
Closing?
• Give one fact that describes each of the 4
economies we have discussed: Traditional,
Command, Market, & Mixed