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Unit 2
Economic Systems
I.
3 Basic Economic Questions
I.

3 Basic Economic Questions
What to Produce?
I.


3 Basic Economic Questions
What to Produce?
How to Produce?
I.



3 Basic Economic Questions
What to Produce?
How to Produce?
Who should Receive the Produced
Goods/Services?
I.




3 Basic Economic Questions
What to Produce?
How to Produce?
Who should Receive the Produced
Goods/Services?
How a society answers these questions
will define their economic system.
Random Riddle

What travels around
the world but stays
in the corner?
Random Riddle

What travels around
the world but stays
in the corner?
A. What to Produce?

What does a country
have for resources?
A. What to Produce?

What does a country
have for resources?
•
•
•
Oil?
Capital (Money)?
Human Resources:
Professional or Labor?
A. What to Produce?

What does a country
have for resources?
•
•
•

Oil
Capital (Money)
Human Resources:
Professional or Labor
Produce it or trade for it?
•
Comparative or Absolute
Advantage?
A. What to Produce?

What does a country
have for resources?
•
•
•


Oil
Capital (Money)
Human Resources:
Professional or Labor
Produce it or trade for it?
•
Comparative or Absolute
Advantage?
How much should we
produce?
Absolute Advantage

When you can
produce a product or
service more
efficiently then your
competition.
Absolute Advantage


When you can
produce a product or
service more
efficiently then your
competition.
Just because you
can do it better, does
that mean you
should?
Comparative Advantage

When your opportunity
cost in producing
something is less than
your competition.
Comparative Advantage


When your opportunity
cost in producing
something is less than
your competition.
What would it cost the
US to become a 100%
manufacturing based
economy?
Comparative Advantage



When your opportunity
cost in producing
something is less than
your competition.
What would it cost the
US to become a 100%
manufacturing based
economy?
Compared to China?
B. How to Produce?

How should scarce
resources be
utilized?
B. How to Produce?


How should scarce
resources be
utilized?
China = Abundance
of Labor
•
Use people to produce
goods/services
B. How to Produce?


How should scarce
resources be
utilized?
China = Abundance
of Labor
•

Use people to produce
goods/services
US = Abundance of
Capital Resources
•
Use machines and
technology to produce
C. Who should receive the
produced goods/services?

Should goods/services
be distributed equally?
•
Communism
C. Who should receive the
produced goods/services?

Should goods/services
be distributed equally?
•

Communism
You get what you give?
•
Capitalism
III. Economic Systems

How a society answers the Basic
Economic questions determines their
system.
II. Economic Systems

How a society answers the Basic
Economic questions determines their
system.
• Command Economy (Communism)
• Mixed Economy
• Traditional (Tribal)
• Market Economy (Capitalism)
Random Riddle

What can you catch
but not throw?
Random Riddle

What can you catch
but not throw?
A. Command Economy

Economy where a
central authority makes
the key economic
decisions.
A. Command Economy

Economy where a
central authority makes
the key economic
decisions.
•
•
•
Equality
Government distributes
goods not the market.
Communist Countries
A. Command Economy

Economy where a
central authority makes
the key economic
decisions.
•
•
•
Equality
Government distributes
goods not the market.
Communist Countries
• N. Korea
• Cuba
• China
• Soviet Union
B. Mixed Economy

An economy that contains both private and
public enterprises.
B. Mixed Economy

An economy that contains both private and
public enterprises.
•
•
•
European countries, Canada
Private = Individually owned
Public = Government owned
B. Mixed Economy

An economy that contains both private and
public enterprises.
•
•
•

European countries, Canada
Private = Individually owned
Public = Government owned
Government controls certain markets:
B. Mixed Economy

An economy that contains both private and
public enterprises.
•
•
•

European countries, Canada
Private = Individually owned
Public = Government owned
Government controls certain markets:
•
•
•
Healthcare
Electricity
Banks?
Solve the Puzzle
C. Traditional

Goods are produced
the way they have
always been produced.
C. Traditional

Goods are produced
the way they have
always been produced.
•
•
•
Tribal
Technology is not as
encouraged
Slow economic growth
• Ethiopia
• Chad
III. Market Economy

Economic decisions are made in the
marketplace.
Random Riddle

What is so delicate
that saying its name
breaks it?
Random Riddle

What is so delicate
that saying its name
breaks it?
A. 5 Features of Market Economy
1.
Private Enterprises- Right of an individual to
choose whether to own a business, what
business to enter, and what to produce with
limited government intervention.
A. 5 Features of Market Economy
1.
2.
Private Enterprises- Right of an individual to
choose whether to own a business, what
business to enter, and what to produce with
limited government intervention.
Private Property-the right to own, use, or
dispose of things of value.
A. 5 Features of Market Economy
1.
2.
3.
Private Enterprises- Right of an individual to
choose whether to own a business, what
business to enter, and what to produce with
limited government intervention.
Private Property-the right to own, use, or
dispose of things of value.
Profit Motive-The desire to work for a profit.
A. 5 Features of Market Economy
1.
2.
3.
4.
Private Enterprises- Right of an individual to
choose whether to own a business, what
business to enter, and what to produce with
limited government intervention.
Private Property-the right to own, use, or
dispose of things of value.
Profit Motive-The desire to work for a profit.
Competition- Rivalry among businesses to
sell goods and services to buyers.
A. 5 Features of Market Economy
1.
2.
3.
4.
5.
Private Enterprises- Right of an individual to
choose whether to own a business, what
business to enter, and what to produce with
limited government intervention.
Private Property-the right to own, use, or
dispose of things of value.
Profit Motive-The desire to work for a profit.
Competition- Rivalry among businesses to
sell goods and services to buyers.
Freedom of Choice-You have the right to
purchase anything (legal) anywhere as long
as it is available.
How does the marketplace
answer the 3 questions?
B. Supply and Demand

Determines what, how much, and who
gets what is produced?
B. Supply and Demand


Determines what, how much, and who
gets what is produced?
Dollar Vote-your decision to spend a
dollar acts as a vote for a product or
service.
B. Supply and Demand



Determines what, how much, and who
gets what is produced?
Dollar Vote-your decision to spend a
dollar acts as a vote for a product or
service.
More votes = more product available
Demand

Demand- The
amount consumers
are willing and able
to purchase at a
given price.
Demand


Demand- The
amount consumers
are willing and able
to purchase at a
given price.
Law of Demand- As
prices increase the
demand decreases.
•
Prices decrease =
Demand increasing
Supply

Supply- The amount businesses are
willing and able to produce at a given
price.
Supply


Supply- The amount businesses are
willing and able to produce at a given
price.
Law of Supply- As prices increase the
quantity supplied increases.
• Prices fall = Supply falls
Price

The relationship between
supply and demand
determines price.
Price

The relationship between
supply and demand
determines price.
• Price too high = surplus
•
Encourages price to
decrease
Price

The relationship between
supply and demand
determines price.
• Price too high = surplus
•
•
Encourages price to
decrease
Price too low = shortage
•
Encourages price to
increase
Price

The relationship between
supply and demand
determines price.
• Price too high = surplus
•
•
•
Encourages price to
decrease
Price too low = shortage
•
Encourages price to
increase
Price just right =
equilibrium or market
price
•
No incentive to change
price
Graphing Supply and Demand


Vertical Axis = Price
Horizontal = Quantity
Graphing Supply and Demand



Vertical Axis = Price
Horizontal = Quantity
Equilibrium- where
supply and demand
meet.
Graphing Supply and Demand




Vertical Axis = Price
Horizontal = Quantity
Equilibrium- where
supply and demand
meet.
Surplus- price above
equilibrium
Graphing Supply and Demand





Vertical Axis = Price
Horizontal = Quantity
Equilibrium- where
supply and demand
meet.
Surplus- price above
equilibrium
Shortage- price
below equilibrium
Graph Supply and Demand
Supply
$
Demand
3
$1
12
6
$2
9
9
$3
6
12
$4
3
What is equilibrium price? Quantity
What happens at $2? How much?
What happens at $4? How much?
Elasticity

How responsive
consumers and
suppliers are to price
change.
Elasticity

How responsive
consumers and
suppliers are to price
change.
• Elasticity is what gives
•
the “Curve” in the Supply
and Demand curve.
We become less
responsive as the price
change increases.
Elasticity
• The flatter the curve the
more elastic or responsive
we are.
•
•
Elastic- Small price change
causes a big quantity change
Luxury items: TV’s, Potato
Chips
Elasticity
• The steeper the curve the
less elastic or responsive
we are.
•
Inelastic- Large price change
causes a small quantity
change
•
Needed items: Medicine, Oil
In Summary

In a Market Economy, who decides:
In Summary


In a Market Economy, who decides:
What is produced?
In Summary



In a Market Economy, who decides:
What is produced?
How its produced?
In Summary




In a Market Economy, who decides:
What is produced?
How its produced?
Who gets what is produced?