Chapter 4 ECONOMICS by Tina Padovani, St. Edmund

1. Chapter 4ECONOMICSby Tina Padovani, St. Edmund

2. Key terms Goods � things you want to buy Capital � the money needed to buy the goods you want. Economics � how individuals choose to use their scarce resources in order to produce and buy the goods they want

3. Scarcity Revolves around the following principle: There are limited resources BUT Unlimited want$ and need$ An issue faced by ALL nations

4. Factors of production These become scarce� LAND � refers not only to the area or space but other examples include� LABOUR � a workforce. This includes� CAPITAL � Refers not only to money but also to investments, such as�

5. For those who like charts�

6. Three Questions that Economies Must Answer What to produce? Grow wheat? Educate population? How to produce it? Allocation of resources For whom to produce it? Should resources be divided evenly? Should wealth decide resource allocation? The goal of every economic system: To make maximum use of available resources

7. Problem of Scarcity

8. ECONOMIC SYSTEMSA brief overview� Command economy � system in which government controls most economic decision making. Market economy � system in which the economy is based on internal free trade. Mixed economy � system in which some areas are privately controlled and some are government controlled.

10. COMMAND ECONOMY in detailAka: Centrally Planned economy Someone in authority decides what should be produced, how it should be produced, and who should receive it. Relies on wise decisions of gov�t vs. people �voting� by spending their money.

11. If a Command Economy is to work this must exist: A) those making commands [government] about production must have the political power to make them. B) the government must either own or control the means of production, to make sure it can produce what it thinks is best.

12. Karl Marx

13. Karl Marx Remembered as the person who organized ideas about the command economy. Best known for criticizing the market system because he felt it separated people into two classes � workers and owners. Owners owned the factories and machines needed to make the goods. Workers worked for the owners.

14. Karl Marx continued� Marx believed all of society would make economic decisions. Command economies rely on governments to make decisions for the people. Governments may not know what people actually want, goods are sometimes produced which people don�t want. At other times, goods that people do want are under produced.

15. The American Economy The United States that each individual has the right to �life, liberty, and the pursuit of happiness.� Americans value political and economic freedom, equality, and national security. Authors of the US constitution of 1787 were influenced by the ideas of Adam Smith who introduced the laissez faire system and the free market economy. Politically and economically, the US believed in private ownership and that business should be guided by natural forces of supply and demand.

17. 3 Basic beliefs about the Market Economy A) The Market (where buyers and sellers meet) regulates the economy. B) Production is done as efficiently as possible to create the maximum amount of profit. C) Goods are produced only if there is a market (people willing to buy the goods).

18. Origins of the Market Economy Mercantilism Aimed at the enlargement of national power; not individual material advancement. Example, England could only gain at another�s expense. Based on gold & silver. For countries without precious metal holdings, it was necessary that they had favorable balances in trade.

19. Continued� Adam Smith�s criticism of Mercantilism: Production of all goods not gold/silver should measure wealth. Doesn�t allow competition. Need for freedom. Puts wealth in the hands of few.

20. The Beginnings of Free Enterprise Free enterprise, takes ideas from Adam Smith. Smith believed that a free marketplace would stimulate production on both sides. As production increased, the best interests of all people would be better served. The invisible hand � naturally steers production and prices through supply and demand He also stated that the market system depended on the freedom of individuals to choose.

21. Madonna sings, �It�s a material world, and I am a material girl.� Free market system encourages us to be more individualistic, uncaring, and selfish.

22. Basic Creed I OWN I DECIDE I PROFIT

23. The Market System and the 3 Economic Question Goods are produced based on what the market will allow. Goods are produced by private companies or individuals acting in their own self interest. Goods are produced for consumers who are willing to pay for them. In Short: Producers and consumers regulate the market via supply/demand

25. Why do NHL players want to play in the United States rather than in Canada? What does the NHL do to compensate for this?

26. Competition In a market system there are winners and losers. Individual entrepreneurs take on a risk and must be able to compete. Competition forces companies to make better products at less expensive prices. Freedom to choose leaves little need for gov�t intervention (invisible hand steers).

27. Problems of the Market Economy Some things are omitted in price calculations: environmental degradation. Might produce goods undesirable and not produce needed goods/services: health care in a market economy. Prices reflect the relationship between S & D. Creates huge inequalities in society: some will not be able to afford goods/services.

28. Advantages & Disadvantages of Market System Quality due to competition. Selection. Tech. Change. Consumer influence. Efficient use of resources; profit. Flexible economy Unequal wealth. Boom bust cycles. Unemployment Manipulation of consumer. Producer can manipulate price. Externalizes costs.

29. Market Economy: Advantages Consumers have economic freedom and choice Gov�t is uninvolved, except to support capitalism and to monitor the safety of products Consumers purchase what they want and producers produce whatever goods they want Competition causes producers to be efficient and innovative

30. Market Economy Adv. continued Americans enjoy selection when shopping for goods relative to other parts of the world Consumers dictate the way the economy runs People are free to live anywhere in the country and apply for the job of their choice Encourages consumer responsibility

31. Market Economy Adv. continued There is no limit to success Bill Gates (2004): According to Forbes magazine, Bill Gates� net worth is $46.6 billion. Compare that to the GDP of the entire country of Zimbabwe in 2004: $24.37 billion (CIA world fact book).

32. Market Economy: Negatives 1. The goal of pursuing a profit can conflict with the goal of government to serve its constituents 2. Some Americans cannot afford the basic necessities of life. [Security /survival are daily problems] E.g. Lack of proper medical attention 3. In free market economies, bigger is often better 4. Encourages dog-eat-dog competition / survival of the fittest. Large corporations eat up small businesses [eliminates competition]

33. 5. Concentration of business into fewer corporations is becoming a concern [E.g. 200 corporations hold about 25% of the income-producing wealth of the nation] 6. Distribution of goods and services goes according to wealth. This is due to income being distributed unequally. E.g. Top 1% of US households take more income than the bottom 15%.

34. Ideal Market Economy Laissez-faire �letting things be.� NO Giant corporations. Gov�t keeps everything fair. Defense. Criminal Justice. Settles disputes. Gov�t taxes minimally. Opportunity abounds. Economic order results unintentionally.

35. Government Intervention Smith did not predict certain conditions and the gov�t must intervene to regulate these: Large corporations-take away personal responsibility Thought self interest would benefit society � did not forsee harmful products, ex alcohol and tobacco. Smith assumed demand was based on need � did not predict impacts of advertising. Ex: Studies show that the exact same perfume sells better if it is given a brand name and priced at $40 a bottle than if given another name and priced at $2 a bottle?

36. Smith did not forsee monopolies Occur when the market is dominated by a single seller. Leaves consumers at the mercy of the monopolistic firm. Gov�t intervenes � antitrust laws- legislation by which the gov�t breaks up large business groups. Sometimes monopolies are necessary, so gov�t tries to regulate prices.

38. Mixed Economy EXAMPLE: CANADA

39. Somewhere between the complete laissez-faire capitalism of the market economy and the strict central controls of the command economy lie the territories of the mixed economies.

40. Mixed Economy A mix of both individual and government ownership. Gov�t gets involved in areas of the economy because some aspects are too important or not profitable enough for the unstable private sector. The Canadian government makes some command choices for its citizens [based on needs that all Canadians have], yet also offers freedom to producers and consumers.

41. Ex. Canada is a large country with a relatively small population. To develop communication and transportation links across Canada is a large task that is not always profitable for private companies. Gov�t owned industries are called Crown Corporations, ex. Canada Post & CN Rail.

42. A Blast from the Past (Chap 3) Standard of living: degree to which people are able to satisfy their wants and basic needs. Quality of life: This is more difficult to measure than standard of living since it includes economic, social, physical, political, and spiritual well-being. These are related and different economic systems have affects on this.

43. ANY QUESTIONS????

44. Sources This power point was created by using the following sources: Mrs. Mauro � Notes Mr. Fiorillo � Power point Microsoft clip art online gallery http://www.cssd.ab.ca/tech/social/tut9/ http://www.forbes.com/2004/02/25/bill04land.html http://www.cia.gov/cia/publications/factbook/