Economic Systems Ch 2 WHAT IS A MARKET

Economic Systems Ch. 2

WHAT IS A MARKET ? ? ?

A nation must answer the 3 basic economic questions (What are they? ) A nations responses to these Q’s are determined by its ECONOMIC SYSTEM- the way people organize the production & distribution of goods/services l

4 TYPES OF ECONOMIC SYSTEMS l. PURE TRADITIONAL l. PURE COMMAND l. PURE MARKET l. MIXED

What is an economic model ? Pure _____ economic systems are all models (they do not exist in the world) l ALL ECONOMIES ARE ____? _____ l Q Why do we label economies? ? ? l Q Why is it important today? l

3 Economic Questions l What to produce? – – l How to produce? – l and in What quantities? Methods of production -FOP’s For Whom to produce? – Allocation of the items produced

Resource allocation l Resource allocation is crucial for a society * and is handled in different ways in different societies WHO GETS THE (FOP’s)FACTORS OF PRODUCTION IN EACH COUNTRY?

Traditional Economy All three economic questions are answered through habit, custom, rituals, religion and tradition. l Roles are defined by the customs of the elders and ancestors. l

Traditional Economy continued Children often carry on the economic roles played by their parents. l - centered around families & social units such as a tribe. l l. SHARING

Traditional Economy continued l Examples: exist today ? ? in parts of Asia, the Middle East, Africa and Latin America – – – – Early Native Americans Amish Inuit Aboriginals Mbuti Masai Asmat

LOST TRIBE ? ? ?

"Un-contacted Indians" l who have never before had any contact with the outside world, were discovered in the Envira River region in Brazil during a flight in May 2008 according to Funai, the National Indian Foundation, and the group Survival International. The tribe is shown here reacting to the unexpected visit over their camp, located close to the border with Peru.

THE NOT SO LOST TRIBE

Command Economy Relies on govt officials or “central planners” to make all economic decisions (they answer all 3 economic Q’s) l Most of the FOP’s are owned by the government l • • What? How? For Whom? Q- Why does this system fail?

Command Economy (Russian Factory Worker) Weaknesses – – Lack of motivation NO incentive for new ideas or innovations Does not provide for development (R&D) Tends to lead to inefficient use of resources

Command Economy continued Examples (very common in the past) Monarchs/Kings owned the land & controlled all trade l – – – Communism Former Soviet Union(FSU) China in the past Cuba Venezuela Iran

Market Economy Individuals or consumers answer 3 Q’s l What to produce is answered through the interaction of producers and consumers– Supply & Demand (PRICE SYSTEM) l Producers will produce goods through the most efficient methods since they are self interested -? l

1776: Adam Smith’s The Wealth of Nations An explanation of the market system. Father of Modern Economics

Market Economy Continued ADAM SMITH: l Govt has NO SAY in economic matters l People can buy, sell or produce anything they want to fulfill their needs or wants l Individuals will work for their own self-interest l Guided by “invisible hand” of competition l Laissez-faire

Was Adam Smith correct? ? ? l Many problems but… 200+ years

Capitalism (4 major characteristics) (pg 25) Need to have for Free Enterprise system to work well. 1) Economic Freedom 2) Voluntary Exchange 3) Private Property Rights 4) Profit Motive

* Economic Freedom l Choices are available to individuals and businesses l Freedom of information is necessary to ensure informed, sensible decisions-making l Why is false advertising illegal?

* Voluntary Exchange The act of buyers and sellers freely and willingly engaging in market transactions l SEE MARKET Def. l Both the buyer and seller are better off after the exchange l NO B&E OR Crack Dealers

* Private Property People have the right and privilege to own possessions and to do what they want with those possessions l Provides incentive to individuals to work and save in order to amass more STUFF l l Why is private property necessary in capitalism?

* Profit Motive l Driving force that encourages people and organizations to improve their material well-being l Free to risk savings in a business venture in the hope they will gain a profit l Does profit motive exist in a command economy? Why or why not?

Market Economy Continued l Examples – – – All examples of Market Economies are actually mixed economies The United States Japan Canada Great Britain

United States is a mixed economy l Also considered a market economy l Also called a ______ country *** Americans are called ______ l Also said to have a______system 34

• INCENTIVES Individuals(consumers) respond to incentivessomething that makes you behave in a certain way--- POS or NEG l

5 th Type? Transitional Economy l in the process of shifting orientation from command to competitive markets. * It involves converting state-owned businesses into private businesses— privatization. l EX’s China, Russia

Socialism In theory, is the transition between capitalism and communism l Under real world socialism, govts exert extensive control over resource allocation *primarily involving key industries such as transportation, energy production, communication, and health care.

When studying different economic systems, it is best to view them on a continuum, as depicted here. Where on the continuum would you place the United States? Canada? North Korea? What do you think is the most effective economic system?

MIXED ( Market + Command ) l How many countries are there?

2 -6 Mixed Economies

MIXED ECONOMY Combines elements of all 3 economies BUT. . . Really just ____&_____ * All countries have mixed economies & can be plotted graphically between pure market & pure command models l

ECONOMIC SYSTEMS of the WORLD China Cuba Hungary PURE COMMAND USA Sweden UK Hong Kong PURE (Free) MARKET

Identify the ECONOMIC SYSTEM

SEE VIDEO Is America #1

A young Soviet Union boy is forced to work in a GULAG by order of his government.

Kim Jong Un(SON) Kim Jong-il(Dead)

TYPES Questions A- Jen goes to the store to purchase a new book bag. She takes almost an hour sorting through the many options before she makes her decision. B-George needs a new coffee maker. He goes to the store and purchases the only coffee maker manufactured in the country. C- Amy helps her mother with the cooking and cleaning and waits for her father and brothers to come home from hunting.

Capitalism l Who makes the decisions in a capitalist society? A. B. C. The government The businesses The consumers

QUIZ TO FOLLOW THE END