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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?