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Economic Systems & The Free Market Economy

Economic Systems & The Free Market Economy. Back to Scarcity…. Scarcity forces YOU to make difficult decisions… And it forces nations to make difficult decisions. Different economic systems have evolved in response to the problem of scarcity.

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Economic Systems & The Free Market Economy

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  1. Economic Systems & The Free Market Economy

  2. Back to Scarcity… • Scarcity forces YOU to make difficult decisions… • And it forces nations to make difficult decisions. • Different economic systems have evolved in response to the problem of scarcity. • Economic System—the method used by a society to produce and distribute goods and services.

  3. The problem of scarcity.... iRespond Question Multiple Choice F A.) only affects rich nations. B.) only affects poor nations. C.) only affects individuals. D.) affects all individuals and all nations. E.)

  4. Three Key Economic Questions • Because resources are limited, every society must answer these three questions: • What goods and services should be produced? • How should these goods and services be produced? • Who consumes these goods and services?

  5. Economic Goals: Efficiency • Societies must make the BEST POSSIBLE use of its resources. • To do so, they have to SPECIALIZE— • Produce whatever it is they are BEST at producing. • What does Iran specialize in? • What does Japan specialize in? • What does the US specialize in?

  6. A good example of specialization is... iRespond Question Multiple Choice F A.) buying a used car instead of a new car. B.) using cash instead of a credit card. C.) deciding to major in biology. D.) going to work instead of taking a nap. E.)

  7. Economic Goals: Economic Freedom • The economic systems of different nations allow for various degrees of freedom… • Some nations (Cuba) allow for very little economic freedom… • Private property is mostly OUTLAWED and most businesses are owned by the government. • The United States has a long tradition of great economic freedom… • “Life, Liberty, and the Pursuit of Happiness”.

  8. A country with a very LIMITED degree of economic freedom is... iRespond Question Multiple Choice F A.) North Korea. B.) the United States. C.) Canada. D.) Mexico E.)

  9. Economic Goals: Open Opportunity • Open Opportunity—the concept that everyone can compete in the marketplace. • This allows for economic mobility—UP OR DOWN. • No matter how much money you start out with, you can end up richer or poorer— • It’s up to… • YOU.

  10. The US' economic system allows for a great degree of economic mobility. iRespond Question Multiple Choice F A.) True. B.) False. C.) D.) E.)

  11. Economic Goals: Security • Successful economic systems reassure people that goods and services will be available when they are needed. • Most societies also try to provide a “Safety Net”… • Government assistance to the poor, elderly and out of work. • What are some “safety net” programs offered in the US?

  12. Economic Goals: Equity • Each society must decide how to “share the wealth”… • And decide how much to provide to those who are unable or unwilling to work. • Should the government tax the rich to assist the poor? • Or is that not “fair”? • A tough decision.

  13. To say that a nation exhibits economic equity means that... iRespond Question Multiple Choice F A.) a small number of people control all of the nation's wealth. B.) economic wealth is equally shared by every citizen. C.) economic wealth is distributed fairly. D.) economic wealth is distributed by the government. E.)

  14. Economic Goals: Growth • A nation’s economy must grow to improve its… • Standard ofLiving—level of economic prosperity. • Much growth comes from innovation… • Changes in technology and methods of production.

  15. The Free Market • A free market is an arrangement that allows buyers and sellers to exchange things. • The “Free Market” system is based on the voluntary exchange of goods and services.

  16. Voluntary Exchange • The free market is based on the concept of voluntary exchange… • Which involves people trading things they value LESS for things they value MORE. • When you buy a gallon of milk from Kroger, you value the milk more than the $3… • Kroger values the $3 more than the milk… • So, both YOU and KROGER have CREATED WEALTH for each other… • Even though you DON’T CARE about each other.

  17. Which of the following is NOT an example of voluntary exchange? iRespond Question Multiple Choice F A.) trading a pair of shoes for a tennis racket. B.) paying 60 cents in sales tax. C.) buying a new car. D.) mowing your neighbor's lawn for $20 E.)

  18. Specialization • The free market also forces us to SPECIALIZE… • Specialization—occurs when individuals focus on a limited number of activities that they do best. • Specialization leads to the MOST EFFICIENT use of time and money.

  19. The Importance of Self Interest • The human race is naturally self-interested… • But in order to survive in a Free Market economy, we must provide some kind of SERVICE… • In exchange for… • INCOME. • And although each of us “intend only our own gain”… • The result is that we HELP EACH OTHER SURVIVE… • Even if we care NOTHING for each other.

  20. The Importance of Competition • The free market allows for as many competitors who wish to enter the market… • And competition also ELIMINATES inefficient producers… • Producers that do not provide low prices and high quality will be driven out of business by those who can. • Sears used to be the biggest retailer in the South…now? • Wal-Mart. • General Motors used to be the biggest auto manufacturer in the world…now? • Toyota. • Who benefits from competition? • You.

  21. An AMC Gremlin. What happened to AMC?

  22. Which of the following is a POSITIVE result of competition? iRespond Question Multiple Choice F A.) lower prices. B.) higher quality products. C.) better customer service. D.) happier employees. E.)

  23. Consumers… • In a free market, CONSUMERS are the kings and queens… • They exercise their power through one action… • PURCHASING. • When consumers buy, they tell produces WHAT to make and HOW MUCH.

  24. Who determines what is produced in the United States? iRespond Question Multiple Choice F 958AF19E-7AFC-3443-841E-E20BBFA6ADB4 A.) producers. B.) consumers. C.) the government. D.) E.)

  25. “The Wealth of Nations” • Was published by Adam Smith in 1776… • It established the theoretical basis of the Free Market Economy. • His revolutionary observation was that an economy needs only TWO regulatory forces: • Self interest—causes consumers to seek high quality, low-priced goods and services… • Competition—forces producers to provide them. • All of this happens without any outside direction… • Adam Smith called this phenomenon the “Invisible Hand”.

  26. According to Adam Smith, a high level of government intervention is necessary for an economy to run successfully. iRespond Question Multiple Choice F 240A93F0-A61F-E34A-BE63-209ED64DFEA4 A.) true. B.) false. C.) D.) E.)

  27. Laissez Faire • Adam Smith believed the free market would provide the best standard of living… • And preached Laissez Faire—HANDS OFF!! • The idea that the government should not interfere in the market.

  28. Which is the BEST description of laissez-faire philosophy? iRespond Question Multiple Choice F A.) a skating rink must obtain numerous permits before opening. B.) pollution restrictions are stiffened by local government officials. C.) you open a lemonade stand and sell glasses for 50 cents. D.) health inspectors shut down the neighborhood supermarket. E.)

  29. Households and Firms • The free market economy is powered by the “household” and the “firm”… • Household—a person or group of persons living in the same residence. These are the CONSUMERS. • Firm—an organization that uses resources to produce a product, which it sells. Firms are the PRODUCERS.

  30. The Factor Market • Firms purchase factors of production from households… • Land, Labor & Human Capital. • This is the factor market— • The place where firms purchase land, labor, human capital and physical capital.

  31. The Product Market • The goods and services that firms produce… • Are sold in the Product Market… • And purchased by households… • With the money they received from firms in the factor market.

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