Learning Goals Answering the Three Economic Questions Identify

Learning Goals: Answering the Three Economic Questions • Identify the three key economic questions of what to produce, how to produce, and who consumes what is produced. • 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. Chapter 2 Section Main Menu

The Three Economic Questions • Every society must answer three questions: – What goods and services should be produced? • How do you think goods and services produced in the U. S. differs from other countries? – How should these goods and services be produced? • Electricity? • Education? • Agriculture? – Who consumes these goods and services? • Societies must decide how to distribute the available goods and services Chapter 2 Section Main Menu

Economic Goals • Societies answer the three economic questions based on their values Economic Goals Chapter 2 Section Economic efficiency Making the most of resources Economic freedom Freedom from government intervention in the production and distribution of goods and services Economic security and predictability Assurance that goods and services will be available, payments will be made on time, and a safety net will protect individuals in times of economic disaster Economic equity Fair distribution of wealth Economic growth and innovation Innovation leads to economic growth, and economic growth leads to a higher standard of living. Other goals Societies pursue additional goals, such as environmental protection. Main Menu

Economic Goals Activity • Read the “Economic Goals and Societal Values” section on pages 25 -26 in the textbook • After reading, rank which economic goals you believe should be most important for our society • Include a brief explanation that explains your rankings Chapter 2 Section Main Menu

Four Economic Systems An economic system is the method used by a society to produce and distribute goods and services. Traditional economies rely on habit, custom, or ritual to decide what to produce, how to produce it, and to whom to distribute it. In a market economy economic decisions are made by individuals and are based on exchange, or trade. In a centrally planned economy the central government makes all decisions about the production and consumption of goods and services. Mixed economies are systems that combine tradition and the free market with limited government intervention. Chapter 2 Section Main Menu

Learning Goals: The Free Market • Explain why markets exist. • Describe the self-regulating nature of the marketplace. • Identify the advantages of a free market ecomony. Chapter 2 Section Main Menu

Bell Ringer • What comes to mind when you hear the term selfinterest? Chapter 2 Section Main Menu

Why Do Markets Exist? Markets exist because none of us produces all the goods and services we require to satisfy our needs and wants. A market is an arrangement that allows buyers and sellers to exchange goods and services. Chapter 2 Section Specialization is the concentration of the productive efforts of individuals and firms on a limited number of activities. Main Menu

The Free Market Economy • • • Based on voluntary exchanges Circular Flow Diagram of a Market Economy Households pay firms for goods and services. Households and business firms use markets to exchange money and products. Households own the factors of production and consume goods and services. Product market monetary flow physical flow Firms supply households with goods and services. Households supply firms with land, labor, and capital. Firms physical flow monetary flow Factor market Chapter 2 Section Main Menu Firms pay households for land, labor, and capital.

The Market’s Self-Regulating Nature • In every transaction, the buyer and seller consider only their self-interest, or their own personal gain. Selfinterest is the motivating force in the free market. • Producers in a free market struggle for the dollars of consumers. This is known as competition, and is the regulating force of the free market. • The interaction of buyers and sellers, motivated by selfinterest and regulated by competition, all happens without a central plan. This phenomenon is called “the invisible hand of the marketplace. ” – How can the introduction of new electronic devices help illustrate this concept? Chapter 2 Section Main Menu

Writing Activity – Self Interest • What do you plan to do after graduation? Will you get a job, go to college, travel, start your own business? – Write a paragraph about how your choices are motivated by self-interest • Now think about the specifics of your choices – which college? Where will you travel? What kind of job or business? – Write a second paragraph explaining how these choices are also motivated by self-interest. • Write a final paragraph explaining how your selfinterest might be affected by competition. Chapter 2 Section Main Menu

Advantages of the Free Market Economic Efficiency Economic Freedom • Producers make only what consumers want, when they want it, and generally at prices they are willing to pay. • Workers work where they want, firms produce what they want, and individuals consume what they want. Economic Growth Additional Goals • Because competition encourages innovation, free markets encourage growth. • Free markets offer a wider variety of goods and services than any other economic system. Chapter 2 Section Main Menu

Discuss • Why is economic equity difficult to achieve in a free market? Chapter 2 Section Main Menu

Economic Profile: Adam Smith (P. 33) • Read and discuss the “checking for understanding” questions together. Chapter 2 Section Main Menu

Learning Goals: Centrally Planned Economies • 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. Chapter 2 Section Main Menu

Bell Ringer • Imagine you are a worker with a guaranteed job in a centrally planned economy. You are told what and how much to produce and when to produce it. • How deeply committed would you be to efficiency, quality, and innovation? Chapter 2 Section Main Menu

Organization of Centrally Planned Economies In a centrally planned economy, the government owns both land capital. The government decides what to produce, how much to produce, and how much to charge. Socialism is a social and political philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout a society. Communism is a political system characterized by a centrally planned economy with all economic and political power resting in the hands of the government. Unlike socialists, communists believed that a socialist society can only come about after a violent revolution. Chapter 2 Section Main Menu

Case Study: The Former Soviet Union • Read pages 36 -37 and be prepared to discuss the following: – Pros/cons of the economic system of the former Soviet Union. – In the Soviet Union, what was the opportunity cost of the emphasis on heavy industry? Chapter 2 Section Main Menu

Learning Goals: Modern Economies • Explain the rise of mixed economic systems. • Describe the role the government plays in a mixed economic system. • Compare the mixed economies of various nations using a continuum. • Explain the role of free enterprise in the economy of the United States. Chapter 2 Section Main Menu

The Rise of Mixed Economies Market economies, with all their advantages, have certain drawbacks. Limits of Laissez Faire Laissez faire is the doctrine that government generally should not interfere in the marketplace. How does the government intervene in our economy? Education, health care, mass transit; laws protecting property rights and contracts, patents, anti-monopoly regulations Chapter 2 Section Main Menu

Government’s Role in a Mixed Economy In a mixed economy, Circular Flow Diagram of a Mixed Economy Product market • The government purchases land, labor, and capital from households in the factor market, and • Purchases goods and services in the product market. monetary flow physical flow t en s m e rn as e v ch gopur ta xe s Households expenditures Government t- s en tor m c rnd fa e v e go wn o physical flow monetary flow Factor market Chapter 2 Section Main Menu expenditures ta xe s Firms

Comparing Mixed Economies • An economic system that permits the conduct of business with minimal government intervention is called free enterprise. The degree of government involvement in the economy varies among nations. Continuum of Mixed Economies Centrally planned Free market Iran North Korea South Africa China Cuba Russia France Botswana Greece United Kingdom Canada Peru Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick Chapter 2 Section Main Menu Hong Kong Singapore United States