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Chapter 2

Chapter 2. Economic Systems. Answering 3 Economic Questions. Section 1. In your own words define the following terms and give an example of each. Producer Consumer Product Market. Bell Ringer. Identify the three economic questions

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Chapter 2

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  1. Chapter 2 Economic Systems

  2. Answering 3 Economic Questions Section 1

  3. In your own words define the following terms and give an example of each. Producer Consumer Product Market Bell Ringer

  4. Identify the three economic questions • Analyze the societal values that determine how a country answers the three economic questions • Explain the characteristics of traditional, command, and market economies and describe the societal values that influence them. Learning Objectives

  5. Economic System • The method used by a society to produce and distribute goods and services

  6. What should be produced? • National defense?/education?/public health?/welfare?/consumer goods? • How should products be produced? • Solar power? / nuclear power? / oil? / family farms? / corporate farms? • Who will consume products? • Who gets what? BMW v. Ford What are the 3 Questions?

  7. Patriotism • Love of one’s country; passion that inspires a person to serve his or her country

  8. Safety Net • Government programs that protect people experiencing unfavorable economic conditions

  9. Efficiency • Making the most of limited resources • Freedom • Patriotism • Security & Predictability • Safety net • Natural disasters, welfare programs, social security, • Goods available when needed Economic Goals

  10. Equity • Fair distribution of wealth =$4=work • Innovation & Growth • Innovation → Growth → higher standard of living • Innovation = inventing new ideas • Other Goals • Example: Environmental Protection Economic Goals Continued

  11. Standard of Living • Level of economic prosperity

  12. Create a Venn Diagram comparing different systems • Traditional • Market • Command • Mixed Types of Economies Mixed

  13. Traditional Economy • Economic system that relies on habit, custom, or ritual to decide questions of production and consumption of goods and services

  14. Based on • Customs • Habits • Rituals • Sons follow in fathers footsteps & daughters follow in mothers footsteps • Very little innovation/growth/change • Examples: Amish, American Indians, Eskimos Traditional Economy

  15. Market Economy • Economic system in which decisions on production and consumption of goods and services are based on voluntary exchange in markets

  16. Focused on the individual • Uses trading • Lots of innovation/growth/change • Example: Hong Kong, Singapore Market Economy

  17. Command Economy • Economic system in which the central government makes all decisions on the production and consumption of goods and services

  18. Government controls everything & makes all decisions for everyone • Very little innovation/growth/change • Examples: Soviet Union, North Korea Command Economy

  19. Mixed Economy • Market-based economic system with limited government involvement

  20. Best of All Economies!! • Government has limited role • Varies from economy to economy • Focuses on individual • Examples: United Kingdom, United States, Canada Mixed Economy

  21. Free Market Section 2

  22. Name and describe two types of economies discussed yesterday. (without your notes if possible) Bell Ringer January 12

  23. Explain why markets exist • Analyze a circular flow model of a free market economy. • Understand the self-regulating nature of the marketplace. • Identify the advantages of a free market Learning Objectives

  24. Market: An arrangement that allows buyers and sellers to exchange things

  25. Specialization: Concentration of the productive efforts of individuals and firms on a limited number of activities

  26. No one makes everything they need/want • Specialization Why do we need MARKETS? • Efficiency of resources

  27. Page 30 in your book! Individuals/ Households Businesses/ Firms Purchase F of P Use resources to produce products & services • Own F of P • Purchases products & services Players in Free Market

  28. Adam Smith - 1776 • Scottish philosopher/entrepreneur • Wrote: The Wealth of Nations

  29. “An economy is made up of countless individual transactions. In each transaction, the buyer & seller consider only their self interest or personal gain.” • Self-interest • One’s own personal gain • Motivating force of Free Market Invisible Hand

  30. Competition • Struggle among producers for consumers’ business • Regulating force of Free Market Self-interest + Competition = Invisible Hand

  31. What keeps prices from skyrocketing? What causes competition? How can incentives be positive or negative?

  32. Free Market Advantages: • Economic Efficiency • Economic Growth • Economic Freedom • Endless Variety of Goods & Services Free Market Disadvantages: • Cannot address public needs/goods • Military / Roads / Libraries / Parks • Economic Equity Free Market Pros & Cons

  33. What if you didn’t have a choice in your job profession…you couldn’t decide what you wanted to do after high school – the government decided for you. • Would you like that? Why or why not? What would be some advantages and/or disadvantages? Please write complete sentences in a short paragraph. Bell Ringer January 13th

  34. Create a Web diagram centered around the word “Dictator” Bell Ringer January 17th

  35. Command EconomyCentrally Planned Economy (CPE) Section 3

  36. Describe how a centrally planned economy is organized • Analyze the centrally planned economy of the former Soviet Union • Identify the problems of a centrally planned economy Learning Objectives

  37. Command Economy: System in which the central government makes all decisions

  38. Central Government • Answers Economic Questions: What to produce, how to produce, & who gets what • Everyone answers to the central govt. • People have no freedoms • Businesses are created by govt. only to provide what is needed CPE Structure

  39. Govt controls all factors of production • People are told where and when to work • No person or business owns land • All physical capital is provided by the govt in rations. • Factories are told how much product to produce • There is no push for efficiency or profit CPE Atmosphere

  40. - Democracy • What is socialism? • A philosophy based on beliefs that democratic means should be used to evenly distribute wealth throughout society • What is communism? • A political system in which the economy & all economic and political power rests in the hands of the central government • Are these the same? How are the different? Socialism & Communism - Authoritarian

  41. Discourages innovation • Poor quality of goods & services • Shortages of goods & services • Diminishing production • Ideals are better than the reality CPE Problems

  42. Mixed Economies Section 4

  43. Why do we need mixed economies? • No economic system has all the answers! • Government intervention has become a greater need in order to provide certain services • National defense; roads/highways; libraries Why Mixed Economy?

  44. Government creates laws to protect property rights, enforce contracts and patent laws Can you think of other reason to have government? Government’s Role

  45. Review Individuals/ Households Businesses/ Firms Buy F of P Produce goods & services • Own F of P • Buy goods & services Circular Flow – Free Market

  46. Individuals/ Households Businesses/ Firms Buy F of P Produce goods & services Government • Own F of P • Buy goods & services • Buy F of P • Buy goods & services • Provide goods & services through taxes on both Households & Firms Circular Flow - Mixed

  47. So how does all this fit together? • Traditional - Command • Free Market - Mixed • How do these systems differ? • How are they similar? • Which goals do these economies achieve?

  48. Which Economies Meet Which Economic Goals?

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