Chapter 2 1 Economics Economic Questions and Economic

Chapter 2. 1 Economics Economic Questions and Economic Goals (p. 23 -26)

The Three Economic Questions (2. 1) • What goods and services should be produced? • How should these goods and services be produced? • Who consumes these goods and services?

The Six Economic Goals Economic Efficiency - making the most of resources Economic Freedom - freedom to produce and sell what you want without interference Economic Security - assurance that goods and services will be there Economic Equity - Fair distribution of wealth in society Economic Growth - Creating innovation (technology) that leads to a better economy Other Economic Goals - society could protect environment, for example

Questions and Goals • “The best way to answer our economic questions in the United States is to start with the underpinnings of our current economic growth and build on these” - Jay Weatherill Using the quote, list 2 economic goals that the United States should have (and explain in 1 sentence for each) in the next few years to answer the economic questions.

The Types of Economies (2. 2) What are the types of economies and how do they fulfill the 3 essential economic questions of a society?

Traditional Economy • People produce just what they need to survive, maintain equilibrium but no more • A wealthy elite class controls factors of production and how they are produced

Market Economy • Producers and consumers determine what gets made and who makes it, control factors of production, answer the economic questions

Market Economy Goals • Economic Efficiency – economy responds well to changes • Economic Freedom – people can get what they want and work where they want • Economic Growth – people are always looking for marginal benefit over cost • Negatives are Economic Security and Economic Equity

Command Economy • The central government decides who will produce what and how much, and owns all factors of production

Command Economy Goals • Economic Security – the government has a tighter grip on the economy and can keep it more secure • Economic Equity – especially in socialism, the government has the ability to equally distribute resources to people • Negatives are Economic Freedom, Economic Growth, and Economic Efficiency

The Mixed Economy • Mixed Economies use consumers, producers, and the government to answer the 3 economic questions • A mixed economy attempts to achieve all goals, but the negatives are that they could fail in achieving any goals (because they don’t focus on any)

The Economic Spectrum of Mixed Economies Command Market No economy is completely command or completely market, but they all have a tendency towards one or the other. The Economic Spectrum compares the economic systems of nations around the world.

Economic Theories (2. 2) Adam Smith’s Capitalism v. Karl Marx’s Communism

The Invisible Hand works because… 1) Competition between buyers and sellers for prices 2) Free Enterprise gives people the right to buy and sell what they want

Karl Marx – The Voice of the Command Economy • Explained in his book “The Communist Manifesto” • The command economy requires: 1) Power lies in the hands of the government 2) Cooperation – working towards a common goal as one nation

Communism v. Socialism • In communism, the job of the central government is to produce what the nation needs most • In socialism, the job of the central government is to spread wealth equally in society

Topic – Workers Pick which side is Marx or Smith • “Society must inscribe on its banners: From each according to his ability, to each according to his needs” • “The more competition extends among the workers, the more do their wages shrink together” • “The real tragedy of the poor is the poverty of their aspirations” • “The real discipline over a workman is not the government, but the fear of losing his customers”

Topic – Production Which side is Marx or Smith • “It is not from the benevolence of the butcher or the baker that we expect our dinner, but from their regard to their own interest” • “It is not by using the money in the country but by making people productive that increases the wealth of the country” • “The production of too many useful things results in too many useless people” • “Machines are weapons employed to quell the revolt of workers”

Topic – Property Pick which side is Marx or Smith • “I have never known • “Abolish all private much good done by property and you will those who trade their find the meaning of property for the public peace” good, rather people should barter and trade among themselves”

Circular Flow Diagram (2. 3) Households, Firms, Factor and Product Markets, Government Influence on the Economy, Mixed Economies

Households and Firms • Households own the factors of production (mainly labor and human capital) and consume the goods and services • Firms (businesses) use resources and factors of production to produce a product and sell it

Factor Market • When firms purchase factors of production from households • Examples would be when a firm buys land, hires workers, borrows money, or purchases a capital good The labor of construction workers is a factor of production bought by a firm or business in the factor market

Product Market • When households purchase goods and services from firms • Households use profits gained from the earlier transaction with firms to pay for the goods The food bought at a grocery and services store counts as a product produced by a firm or business that is bought at a product market

Market v. Command • In a market economy the circular flow diagram runs without government intervention • In a command economy the circular flow diagram is controlled by the government