Chapters 2

1
Chapters 2 3 Economic Systems
2

• Introduction Vocabulary
• Economic Systems Chart
• Traditional Economy
• Market Economy
• Circular Flow Diagram
• Command Economy
• Marxism
• Lenin
• Stalin
• Gorbachev
• Mixed Economy
• Circular Flow Diagram
• Other Vocabulary
• Poverty

3
Turn to Page 1
4
1.What is an Economic System?
The method used by a society to produce and
distribute goods and services
5
What are the FOUREconomic Systems?

1. Traditional
2. Market
3. Command (Centrally Planned)
4. Mixed

6
2. What are the FOUREconomic Questions?

1. What goods and services should be produced?
2. How should these goods and services be produced?
3. Who consumes these goods and services?
4. For Whom are the goods and services produced?

7
3. What are the Economic Goals?

• Efficiency Use the most of resources
• Freedom Lack of government intervention
• Security / Predictability Assurance that goods
  and services will be available
• Equity Fair distribution of wealth
• Innovation / Growth Innovation leads to
  economic growth

8
Other Vocabulary Words

• Safety net
• Government programs that protect people
  experiencing unfavorable economic conditions
• Provides for Natural disasters, injuries,
  joblessness
• Does NOT provide for
• Low Income

9
Other Vocabulary Words

• Standard of Living
• Level of economic prosperity

10
Turn to the Chart
11
Traditional

• A traditional economic system is one in which
  people's economic roles are the same as those of
  their parents and grandparents. Societies that
  produce goods and services in traditional ways
  are found today in some parts of South America,
  Asia, and Africa. There, people living in an
  agricultural village still plant and harvest
  their own food on their own land. And the ways
  they produce clothing and shelter are almost
  exactly the same as those used in the past.
  Tradition decides what these people do for a
  living and how their work is performed.

12
Traditional
Who answers the 4 Economic Questions? Habit, custom, ritual, tradition
Advantages Security (know what will do in life) Freedom (no government)
Disadvantages Equity (Some have more than others) Growth (Stagnant, not moving)
Examples Third-world countries
Examples in Practice Haiti, Rwanda, Chad
Associated Terms Non-industrialized
Other Terms Children usually do the same job as parents
13
Market

• A market economic system is one in which a
  nation's economic decisions are the result of
  individual decisions by buyers and sellers in the
  marketplace. When you finish school, you may go
  to work where you choose, if a job is open. You
  are also free to go into business on your own.
  Suppose that you decide to open a business. You
  will risk the money that you have saved or
  borrowed in the hope that you will be successful.
  The price that you charge for your goods or
  services will be influenced by the prices charged
  by your competitors (other businesses selling the
  same items). The success that you have will
  depend on the demand by consumers for your goods.
  You may do extremely well. But if people do not
  want what you are selling, you will go out of
  business.

14
Market
Who answers the 4 Economic Questions? Individuals
Advantages Efficiency (voluntary exchange) Freedom (lack of government) Growth (motivated to improve)
Disadvantages Equity (some have more than others) Security (possibility of failure)
Examples NO pure Market Economies
Examples in Practice U.S., England, Japan
Associated Terms Free enterprise, Capitalism
Other Terms Producers motivated by profit, Voluntary exchange
15
Command (Centrally Planned)

• In a command economic system, the main decision
  maker is the government. No person may
  independently decide to open and run any kind of
  business. The government decides what goods and
  services are to be produced. And the government
  sells these goods and services. The government
  also decides how the talents and skills of its
  workers are to be used.

16
Command
Who answers the 4 Economic Questions? Government
Advantages Security (Government appointed positions) Efficiency (Central planning regulation)
Disadvantages Growth (Stagnant, not moving) Freedom (Government control)
Examples No pure Command Economy
Examples in Practice Cuba, China, Laos
Associated Terms Socialism, Communism
Other Terms Assigned jobs, Government owns everything
17
Mixed

• The United States has a combination of a Market
  economy and a Command Economy

18
Mixed
Who answers the 4 Economic Questions? Individuals and Government
Advantages Growth (ability to change and improve) Efficiency (combination of individuals government)
Disadvantages Equity (some have more than others) Security (possibility of failure)
Examples U.S., Canada, China, England
Examples in Practice ______
Associated Terms ______
Other Terms Continuum
19
(No Transcript)
20
Traditional Economy
21
Traditional Economy
Women usually work at home and/or do the same
work their mothers did
Men usually do the same work their fathers did
Example My grandfather was a carpenter My father
was a carpenter I am a carpenter My son is a
carpenter
Usually stagnant, low standard of living
Example Third-world countries
22
Standards

• 6.1.12AB
• 6.4.12AB
• 6.5.12DE

23
Market Economy
24
Vocabulary
Invisible Hand used to describe the self-regulating nature of the marketplace
Profit financial gain made in a transaction
Competition the struggle among producers for the dollars of consumers Regulating force in a free market
Self-interest ones own personal gain Motivating force in a free market
25
Invisible Hand Example Coca-Cola in the Europe

• In 1989, as the Berlin Wall was toppling,
  Douglas Ivester, head of Coca-Cola Europe (and
  later CEO), made a snap decision. He sent his
  sales force to Berlin and told them to start
  passing out Coke. Free. In some cases, the
  Coca-Cola representatives were literally passing
  bottles of soda through holes in the Wall.
• --Naked Economics, page 3

26
Invisible Hand Example Coca-Cola in the Europe

• He recalls walking around Alexanderplatz in
  East Berlin at the time of the upheaval, trying
  to gauge whether there was any recognition of the
  Coke brand. Everywhere we went, we asked people
  what they were drinking, and whether they liked
  Coca-Cola. But we didnt even have to say the
  name! We just shaped our hands like the bottle,
  and people understood. We decided we would move
  as much Coca-Cola as we could, as fast as we
  couldeven before we knew how we would get paid.
• --Naked Economics, page 3

27
Invisible Hand Example Coca-Cola in the Europe

• Coca-Cola quickly set up business in East
  Germany, giving free coolers to merchants who
  began to stock the real thing. It was a
  money-losing proposition in the short run the
  East German currency was still worthlessscraps
  of paper to the rest of the world. But it was a
  brilliant business decision made faster than any
  government body could ever hope to act.
• --Naked Economics, page 3

28
Invisible Hand Example Coca-Cola in the Europe

• By 1995, per capita consumption of Coca-Cola in
  the former East Germany had risen to the level in
  West Germany, which was already a strong market.
• --Naked Economics, page 3

29
Invisible Hand Example Coca-Cola in the Europe

• In a sense, it was Adam Smiths invisible hand
  passing Coca-Cola through the Berlin Wall. Coke
  representatives werent undertaking any great
  humanitarian gesture as they passed beverages to
  the newly liberated East Germans. Nor were they
  making a bold statement about the future of
  communism.
• --Naked Economics, page 3-4

30
Invisible Hand Example Coca-Cola in the Europe

• They were looking after businessexpanding
  their global market, boosting profits, and making
  shareholders happy. And that is the punch line
  of capitalism. The market aligns incentives in
  such a way that individuals working for their own
  best interestpassing out Coca-Cola, spending
  years in graduate school, planting a field of
  soybeans, designing a ratio that will work in the
  showerleads to thriving and ever-improving
  standard of living for most (though not all)
  member of society.
• --Naked Economics, page 4

31
(No Transcript)
32
(No Transcript)
33
(No Transcript)
34
(No Transcript)
35
(No Transcript)
36
(No Transcript)
37
(No Transcript)
38
(No Transcript)
39
Self-interest Example 1

• Self-interest make the world go around, a point
  that seems so obvious as to be silly. Yet it is
  routinely ignore. The old slogan From each
  according to his abilities, to each according to
  his needs
• --Naked Economics, p. 27

40
Self-interest Example 2 The Prisoners Dilemma

• The basic idea is that two men have been
  arrested on suspicion of murder. They are
  immediately separated so they can be interrogated
  without communicating with one another. The case
  against them is not terribly strong, and the
  police are looking for a confession. Indeed, the
  authorities are willing to offer a deal if one of
  the men rats the other as the trigger man.

41
Self-interest Example 2 The Prisoners Dilemma

• If neither man confesses, the police will charge
  them both with illegal possession of a weapon,
  which carries a five-year jail sentence. If both
  of them confess, then each will receive a
  twenty-five-year murder sentence. If one man
  rats out the other, then the snitch will receive
  a light three-year sentence as an accomplice and
  his partner will get life in prison. What
  happens?

42

• The men are best off collectively if they keep
  their mouths shut. But thats not what they do.
  Each of them starts thinking.Prisoner A figures
  that if his partner keeps his mouth shut, then he
  can get the light three-year sentence by ratting
  him out. Then it dawns on him His partners is
  almost certainly thinking the same thingin which
  case he had better confess to avoid having the
  whole crime pinned on himself. Indeed, his best
  strategy is to confess regardless of what his
  partner does It either gets him the three-year
  sentence (if his partner stays quiet) or saves
  him from getting life in prison (if his partner
  talks)

43

• Of course, Prisoner B has the same incentives.
  They both confess and they both get twenty-five
  years in prison when they might have served only
  five. Yet neither prisoner has done anything
  rational.
• --Naked Economics, p. 34

44
Vocabulary
Voluntary Exchange Each person willfully trades items and expects to gain something from the transaction
Incentive Expectation that encourages people to behave in a certain way Ex Consumers look for lower price
Consumer Sovereignty Power of consumers to decide what gets produced
Specialization Concentration of productive efforts of individuals and firms on a limited number of activities
45
Incentive Example 1

• When we are paid on commission, we work
  harder,if the price of gasoline goes up, we drive
  less
• -- Naked Economics, p. 26

46
Incentive Example 2

• Have you ever seen some variation of the sign
  near the cash register at a fast food restaurant
  that says,
• Your meal is free if you dont get a receipt.
  Please see a manager?
• Does Burger King have a passionate interest in
  providing a receipt so that your family
  bookkeeping will be complete?

47
Incentive Example 2

• Burger King does not want its employees
  stealing. Burger King can either spend a lot of
  time and money monitoring its employees for
  theft, or it can provide an incentive for you to
  do it for them.
• --Naked Economics, p. 31

48
Who is Adam Smith?

• A Free Market philosopher who wrote the book,
  Wealth of Nations

http//www.econlib.org/library/Enc/bios/Smith.html

49
Adam Smith Quote

• It is not from the benevolence of the butch, the
  brewer, or the baker that we expect our dinner,
  but from the regard to their own interest
• --Naked Economics, p. 27

50
Capitalism Example

• At the beginning of the twentieth century, half
  of all Americans worked in farming or ranching.
  Now that figure is about one in a hundred and
  still falling. (Iowa is still losing roughly
  fifteen hundred farmers a year.) Note that two
  important things have NOT happened (1) We have
  not starved to death and (2) we do not have a 49
  percent unemployment rate.

51
Capitalism Example

• Instead, American farmers have become so
  productive that we need far fewer of them to feed
  ourselves. The individuals who would have been
  farming ninety years ago are now fixing our cars,
  designing computer games, playing professional
  football, etc.
• --Naked Economics, p. 36

52
Political Ideologies
Capitalism Socialism Communism
Means of Production Private Public private Public
Who/what determines economic activity Consumers businesses Government, Consumers, Businesses Government
Example You have 2 Cows You sell one and buy a bull The government takes them and puts them in a barn with everyone elses cows, then gives you as much milk as it thinks you need. Your neighbors help you take care of them and everyone shares the milk
53
Circular Flow Diagram for a Market Economy
54
Turn to page 30 in your Economics textbooks
55
Product Market
Monetary Flow
Physical Flow
Households
Firms
Physical Flow
Monetary Flow
Factor Market
56

57
Words associated with a Circular Flow Diagram
Household person or group of people
living in the same residence
Firms an organization that uses resources to
produce a product, which it then sells
Monetary Flow movement of money
Physical Flow movement of products
Factor Market firms purchase the factors of
production from households
Product Market households purchase goods
services from firms
58
Standards

• 6.1.12AB
• 6.2.12AB
• 6.4.12AB

59
(No Transcript)
60
Command Economy(Centrally Planned)
St. Basil Cathedral in Moscow
61
Command Economy Example 1

• Charles Weelan, author of Naked Economics, was
  recently part of an Illinois delegation visiting
  Cuba. Because the visit was licensed by the U.S.
  government, each member of the delegation was
  allowed to bring back 100 worth of Cuban
  merchandise, including cigars.
• -- Naked Economics, page 5

62
Command Economy Example 1

• Having been raised in the era of discount
  stores, we all set out looking for the best price
  on Cohibas so that we could get the most bang for
  our 100 allowance. After several fruitless
  hours, we discovered the whole point of
  communism The price of cigars was the same
  everywhere.
• -- Naked Economics, page 5

63
Command Economy Example 1

• There is no competition between stores because
  there is no profit as we know it. Every store
  sells cigarsand everything else for that
  matterat whatever price Fidel Castro tells
  them to. And every shopkeeper selling cigars is
  paid the government wage for selling cigars,
  which is unrelated to how many cigars he or she
  sells.
• -- Naked Economics, page 5

64
Command Economy Example 2

• During the twentieth century, communist
  governments killed some 100 million of their own
  people in peacetime, either by repression or by
  famine
• --Naked Economic, p. 21

65
Who is Karl Marx?
66
Who is Karl Marx?

• His philosophy has become known as Marxism
• Capital, published in 1872
• Father of Communism
• There are FIVE stages a society goes through
• To get to each stage, there is a Violent
  Revolution

1. Tribal
2. Primitive Communism
3. Feudalism / estate property
4. Capitalism
5. Communism

http//www.sla.purdue.edu/academic/engl/theory/mar
xism/modules/marxstagesmainframe.html
67
No social classes (family instead) Hunting/
gathering Slaves create social classes
population increases leading to wants, creating
relations with others leads to war or bartering
Tribal
Union of several tribes either by conquest or
agreement Private property creates a working
class (proletariat)
Primitive Communism
A certain amount/ percentage of working class
income was given to aristocracy (royalty)
Feudalism / estate property
People gain items Aristocracy goes into debt
Proletariat are fooled to believe that they are
in control, where instead Aristocracy exploits
them and takes part of their wealththey feel
like they are the property of the Aristocracy
Capitalism
Goal in society, people do things for the greater
good of society
Communism
Read pg1-3
68
Russia
69
United States
70
Russia vs. United States

• Land 16,995,800 sq km
• Largest country in the worlddifficult to plant
  on
• Population 143,420,309 (July 2005)

• Land 9,161,923 sq km
• (only continental U.S.)
• World's third-largest country by size (Russia,
  Canada)
• Population 295,734,134
• (June 2005)
• Worlds third-largest population (China, India)

• http//www.cia.gov/cia/publications/factbook/index
  .html

71
Leaders of Russia
Vladimir Lenin
Years in Power 1917 1924
Role / Importance in Russia Supports Marxism Leader of Bolsheviks (Russian Communists) Duty of elite to lead poor Leader of November 1917 Revolution
72
Who was Vladimir Lenin?
http//www.marxlibrary.net/lenin/lenin_2.htm
73
Leaders of Russia
Vladimir Lenin Joseph Stalin Man of Steel
Years in Power 1917 1924 1924 1953
Role / Importance in Russia Supports Marxism Leader of Bolsheviks (Russian Communists) Duty of elite to lead poor Leader of November 1917 Revolution 5-Year Plans promoting heavy industry Collectivization Purges
74
Who is Joseph Stalin?
75
Leaders of Russia
Vladimir Lenin Joseph Stalin Man of Steel Mikhail Gorbachev
Years in Power 1917 1924 1924 1953 1985 1990
Role / Importance in Russia Supports Marxism Leader of Bolsheviks (Russian Communists) Duty of elite to lead poor Leader of November 1917 Revolution 5-Year Plans promoting heavy industry Collectivization Purges Initiatives Perestroika Glasnost Democratization End of Soviet Union

76
Who is Mikhail Gorbachev?
77
Vocabulary
78
Five Year Plans

• Bring all industry under state control
• All industrial development planned by state
• Emphasis on weapon production
• (using heavy industry)

79
What is heavy industry?
Industry that requires a large capital
investment and produces items used in other
industries Examples Chemical, Steel, Heavy
machinery
80
What are Purges?
Name given to when Stalin killed those
who threatened to overthrow his power
81
What are collectives?
Large farms leased from the state to groups of
peasant farmers (Many small farms combined into
one large farm)
82
Gorbachevs Initiatives

• Perestroika
• rebuilding Reforming communism (example help
  the workers in collectives by allowing them to
  have private farms)
• Glasnost
• public voicing public discussion of issues,
  accessibility of information to the public
• Democratization
• Expand participation in the political process

83
Prior to 1917 Feudalism
84
Russian Social Classes Feudalism

• Tsar (Ruler) Nicholas II ? ? ?
• Landowners ? ? ? ?
• Serfs - peasants who were not
• allowed to leave the land without
• their owners permission)
• made up 90 of Russias population

Read pg. 4
85
Russia, Prior to 1917

• Combined Society of Farming Industrial
• People worked 12-hour days
• Illegal to have
• a) labor unions
• b) strikes
• c) socialist political parties
• d) workers newspapers
• If violated, could be shot or arrested

86
Russia, Prior to 1917

• Combined Society of Farming Industrial
• People worked 12-hour days
• Illegal to have
• a) labor unions
• b) strikes
• c) socialist political parties
• d) workers newspapers
• If violated, could be shot or arrested

People NOT paid muchand hungry!
Karl Marxs publication, Capital circulating
through country
87
Russia, by 1917

• Russia was in World War I
• Very cold weather conditions
• Severe food shortages

88
March 1917 Capitalism
Read pg 5 Top
89
March 1917

• Workers in Petrograd (St. Petersburg) demanded
• a 50 raise in pay so they could buy food
• Management refused the workers request
• Workers went on strike
• Workers were locked out of work,
• Workers do NOT get paid

http//www.historylearningsite.co.uk/lenin.htm
90
March 1917

• Tsar Nicholas II refuses to release emergency
  food supplies
• Rioters release people from jail
• 25,000 soldiers mutinied and took the workers
  side
• Tsar Nicholas was forced to give up the throne!
• (NOTE Lenin was not involved in this Revolution)

91
The Bolsheviks believed this wasRussia moving
fromFeudalist society (Stage 3)into Capitalism
(Stage 4)
92
Who was Vladimir Lenin?
http//www.marxlibrary.net/lenin/lenin_2.htm
93

• In 1887, Lenins elder brother was arrested and
  hanged for plotting to kill the tsar (king) of
  Russia. At this time nearly all Russians saw the
  tsar as a god. It is claimed that when Lenin
  heard about the execution, he said "Ill make
  them pay for this. I swear I will." Many years
  later, Lenins wife said that it was this event
  that turned Lenin into a revolutionary with a
  desire to rid Russia of the system that had been
  responsible for Alexanders execution.

94

• In 1895, he went on a visit to Europe. When he
  returned he brought back communist books and
  leaflets. This was strictly forbidden in Russia,
  he was arrested and sent to prison, and later was
  exiled to an area called Siberia. He had to stay
  there until 1900. After his release, he spent
  much of his time out of Russia living in Europe.
  He produced a newspaper, which was smuggled into
  Russia by supporters of Lenin. However, his face
  was too well known by the secret police for Lenin
  to have been safe in Russia.

95
Leaders of Russia
Vladimir Lenin
Years in Power 1917 1924
Role / Importance in Russia Supports Marxism Leader of Bolsheviks (Russian Communists) Duty of elite to lead poor Leader of November 1917 Revolution
96
Lenin believed
The poor Russians were uneducated, and
therefore incapable of educating themselves.
Therefore, Lenin believed it was the duty of
elite intellectuals to lead the poor.
97

• A civil war in Russia started. Any problems were
  dealt with by the feared communist secret police.
  In the factories, the government took complete
  control. In the countryside, the secret police
  was sent out to take food from the peasant
  farmers. Anybody found keeping food from others
  was shot. The peasants responded by producing
  food only for themselves and so the cities were
  more short of food than before. Life under Lenin
  appeared to be worse than under Nicholas II! The
  civil war had devastated Russias economy.

98
November 1917 Communism
Read pg 5 Bottom Pg. 6 Top
99

• By October 1917, Lenin felt the time was right
  for a revolution. He returned in disguise. The
  actual details for the revolution were left to
  Leon Trotsky but the actual date for it to begin
  was left to Lenin.

100

• Speeches were made by Trotsky as to why people
  should support the communists. While he was
  giving these speeches, he knew that the Red
  Guards and armed workers were actually taking
  over key points in the city. By the time that the
  speeches had finished most of the city was in the
  hands of the Bolsheviks (communists led by Lenin)
  - as Trotsky had planned. The telephone and
  telegraph buildings were taken over, as were the
  power stations. Bridges were captured. So were
  the railway stations. There was very little
  bloodshed and it is probable that many people in
  Petrograd were unaware of what had happened when
  they woke up in the morning.

101

• Throughout the November 7th the Red Guards kept
  on occupying important buildings. By
  mid-afternoon, the only building not held by the
  Bolsheviks was the Winter Palace, the old home of
  the tsar. It was here that the Provisional
  Government met. In fact, the troops who were
  meant to be defending the building had gone home
  and only the Womens Battalion remained.

102

• By the end of the day the members of the
  Provisional Government were under arrest, the
  tsar and his family were also under house arrest.
  Lenins statement that he would overturn the
  government of Russia - made after his brother had
  been executed - was fulfilled.
• Forming a government of Bolsheviks and that it
  would contain no middle class people. The
  government would work to help the workers and
  peasants. Lenin's problems included limited
  control of Russian territory, many groups against
  his rule, and Russia was still in World War One

103

• What became of the royal family ?
• Once the communists had taken over in November
  1917, the royal family became a problem as there
  were many thousands who still believed in royalty
  and were willing to fight to have the family
  restored to power. To stop this from happening,
  an order was made for them to be executed. In the
  summer of 1918, the Romanov family was under
  house arrest in another city. It is said that
  they were told to get ready to go to Germany
  because they were to leave Russia. They were
  taken to a cellar and shot by the Communist
  secret police. Their bodies were thrown down a
  series of wells in a forest so that it was
  impossible for any relics of them to be found.

104
November 1917

• Lenin in charge of events
• Trotsky and other communists were giving speeches
  
• Bolsheviks took over key points of Petrograd
• The Bolsheviks arrested Tsar Nicholas II and all
  of the royal family
• July 16, 1918? A group of people (probably the
  Bolsheviks) killed Tsar Nicholas II and all of
  the royal family, the family doctor, and 3 others
  (11 total were killed)

105
The Bolsheviks believed this wasRussia moving
from Capitalism (Stage 4) into Communism
(Stage 5)
106
Movie (1917)
107
1924 - 1953
Read Bottom pg. 6 Pg 7 8
108
1924

• Lenin dies
• Petrograd is renamed Leningrad
• Stalin becomes leader of Russia

109
Who is Joseph Stalin?
110
1924 - 1953

• Stalin institutes several Five-Year Plans
• Heavy Industry, Collectives, Purges
• Managers had targets to fulfill
• Propaganda encouraged people
• Good managers / workers rewarded
• Bad managers / workers disciplined
• (fined, work camps, prison, executed)

111

• Stalin became a follower of Lenin and went to
  secret meetings and distributed leaflets.
• When Stalin became the undisputed leader of
  Russia in 1929, he realized that Russia was far
  behind the west and that she would have to
  modernize her economy very quickly if she was to
  survive. Also a strong economy would lead to a
  strong military if Russia was going to survive
  threats from external forces. A modernized Russia
  would also provide the farmers with the machinery
  they needed if they were going to modernize their
  farms - such as tractors.
•  

112

• The Five Year Plans
• This brought all industry under state control
  and all industrial development was planned by the
  state. The state would decide what would be
  produced, how much would be produced and where it
  should be produced. The targets were completely
  unrealistic and could not be met but vast
  improvements were made. The emphasis was on heavy
  industries such as coal, oil, iron and steel and
  electricity. Stalin brought in experts from
  foreign countries to help them.

113

• Products produced were frequently so poor that
  they could not be used - even if the factory
  producing those goods appeared to be meeting its
  target. The punishment for failure was severe. A
  manager could be executed as an "enemy of the
  people". Workers could be sent to a prison camp
  in Siberia. Nobody was allowed to condemn or
  criticize the five year plans as they were
  Stalins idea.

114

• Life for the workers
• 
  
  Life was very hard for industrial
  workers. Their pay was poor and there was barely
  anything they could spend their money on even if
  they had any. Consumer goods were simply not
  produced. Working conditions were very dangerous
  and the hours were long.

115
Shortage Example

• There is an old-pre-Cold War story about a
  Soviet official who visits an American pharmacy.
  The brightly lit aisles are lined with thousands
  of remedies for every problem from bad breath to
  toe fungus.
• --Naked Economics, page 5

116
Shortage Example

• Very impressive, he says. But how can you
  make sure that every store stocks all of these
  items?
• --Naked Economics, page 5

117
Shortage Example

• The anecdote is interesting because it betrays a
  total lack of understanding of how a market
  economy works. In America, there is no central
  authority that tells stores what items to stock,
  as there was in the Soviet Union. Stores sell
  the products that people want to buy, and in
  turn, companies produce items that stores want to
  stock.
• --Naked Economics, page 5

118
Shortage Example

• The Soviet economy failed in large part because
  government bureaucrats directed everything, from
  the number of bars of soap produced by a factory
  in Irktusk to the number of university students
  studying electrical engineering in Moscow . In
  the end, the task proved overwhelming.
• --Naked Economics, page 5

119
Shortage Example 2

• There is an old joke, one of Ronald Reagans
  favorites A Soviet women is trying to buy a
  Lada, one of the cheap automobiles make in the
  former Soviet Union. The dealer tells her that
  there is a shortage of these cars, despite their
  reputation for shoddy quality. Still, the woman
  insists on placing an order.
• --Naked Economics, page 63

120
Shortage Example 2

• The dealer gets out a large, dusty ledger and
  adds the womans name to the long waiting list.
  Come back two years from now on March 17th, he
  says.
• --Naked Economics, page 63

121
Shortage Example 2

• The woman consults her calendar. Morning or
  Afternoon? she asks.
• What difference does it make? the surly dealer
  replies. Thats two years from now!
• --Naked Economics, page 64

122
Shortage Example 2

• The plumber is coming that day, she says.
• --Naked Economics, page 64

123

• Good managers were well rewarded. Unsuccessful
  managers could pay a severe price for failure.
  Punishment was also used by those who did not
  work hard. Bad comments from your manager could
  also lead to prison.

124

• Collectivization was Stalins answer to his
  belief that Russias agriculture was in a
  terrible state. Stalin believed that Russia had
  to be able to feed itself - hence
  collectivization - and that at the very least the
  peasant farmers should be providing food for the
  workers in the factories if the Five Year Plans
  were going to succeed.
• Collectivization meant that small farms would be
  gathered together to form one large massive one.
  These bigger farms would be called collectives.
  The key to collectives would be the use of
  science and machinery.

125

• However, many peasants, rich or poor, were
  against collectivization. The land that Lenin had
  given them was now being taken away by Stalin.
  Those villages that were due for collectivization
  but did not want to join a collective, killed
  their animals and destroyed their grain so that
  they could not be taken by the soldiers and
  secret police. By 1939, Russia was producing the
  same amount of food as it had in 1928.
  Collectivization was clearly a disaster.

126

• What was controlled / Censored by the state?
• Education
• Religion leaders arrested and churches shut
  down
• Media (television, radio, newspapers, books)
• Farming
• Factories
• Weddings, divorces, births (abortions)
• Medicine

127

• So why was a failure of policy allowed to
  continue? Simply because it was Stalins idea and
  nobody would dare tell Stalin that one of his
  ideas was a mistake.
• Stalin's control over Russia meant that freedom
  was the one thing that people lost. Some people
  committed suicide rather than do what the state
  ordered them to do. Many others tried to leave
  the country.

128

• Also many of Russia's most talented people had
  been murdered during the Purges of the 1930's.
  Anyone with talent was seen as a threat by the
  increasingly paranoid behavior associated with
  Stalin and were killed or imprisoned.

129
What happened after Stalin died in 1953?

• Some mourned Stalin
• Some were happy he was dead
• Several leaders in Russia from 1953 until
• Khrushchev (1953 - 1964)
• Andropov (1964 - 1984)
• Chernenko (1984 - 1985)
• Gorbachev (1985 1989)

130
1985 1990
Read pg. 9
131
1985 1990

• Mikhail Gorbachev leader of the Soviet Union and
  institutes several initiatives, including
  Glasnost, Perestroika, and Democratization, which
  ultimately lead to the downfall of the Soviet
  Union

132
Who is Mikhail Gorbachev?
133
Reasons the Soviet Union Collapsed

1. Size of Country
2. Size of Population
3. Type of Geography
4. Gorbachevs initiatives
5. Lack of Incentives

134
Is Communism GOOD or BAD?
Support Oppose
Area is small People get what they need Contribute to society Like to work together and/or like to work Area is too large Shortages of products Lack of individuality Dont like each other and/or dont like to work
135
Movie(1990)
136
Review Questions

1. Explain how a traditional economy works?
2. What is the name of the Free Market philosopher?
3. What was the name of the last tsar of Russia and
   the First communist leader?
4. Whose philosophy did Russia adopt in 1917?
5. Who/What answers the 4 economic questions in each
   economic system?
6. What type of economic system does the U.S. have?

137
Standards

• 6.1.12AB
• 6.2.12B
• 6.4.12AB

138
(No Transcript)
139
Product Market
Monetary Flow
Physical Flow
Households
Firms
Physical Flow
Monetary Flow
Factor Market
140
Mixed Economy
141
Why is the United States a Mixed Economy?
Free Market Command
What goods and services should be produced? Profits Anti-trust laws Government monopolies
How should the goods and services be produced? Profits Consumer sovereignty Safety regulations
Who will consume these goods and services? Profits Pollution laws
For whom are the goods and serves produced? Profits Income Welfare Public goods
142
Mixed Economy Vocabulary

• Continuum
• A range with NO clear divisions

(Open your Economics textbooks to page 43)
143
Mixed Economy Vocabulary

• Laissez faire
• Hands off
• Government should NOT intervene in the
  marketplace
• Transition
• A period of change an economy moves through from
  a Command Economy
• Privatized
• To sell state-run firms to individuals

144
Therefore, we considered the United States a
Free Enterprise System
Here are some characteristics of our Economic
System
145
Characteristics of an American Free Enterprise

• Public disclosure laws
• Laws requiring companies to provide
• full information about their products
• Caveat emptor
• Let the buyer beware
• Poverty threshold
• Income level below what is needed to
• support a family or household

146
Mixed Economy

• How much money a year would you need to have to
  live comfortablywithout any help / aid from
  anyone
• You work and Live in Northampton.
• Necessities
• Luxuries

147
What is Poverty?

• Suppose you made 10 an hour and worked 40 hours
  each week.
• How much money would you bring home each week?
• 400.00?

148
What is Poverty?

• Well, if your getting paid legally, the
  government usually takes out about 1/3 of your
  paycheckEVERY WEEK!!!
• That would mean of the 400 a week you would make
  before taxes are take out (called Gross Income),
  the government would take about 125.00
• This would leave you with about 275.00 each week
  to use or save (called your Net Income)

149
What is Poverty?

• If you brought home 275 a week for a month (4
  weeks), that would mean you would make 1100 a
  monthafter taxes of course.
• This means you would make 14,300 a year(52
  weeks)after taxes of course
• By the way, if you did NOT have taxes taken out,
  you would make 20,800.

150
What is Poverty?
Item Cost Amount left
Income (275 x 4 weeks) 1100 1100

Rent (you need a place to live) 450 650
Electric (or oilheat, stove, lights) 100 550
Phone (communication) 35 515
Television (or computer, nightly entertainment) 40 475
Transportation (gas for car, bike, bike) 100 375
Maintenance (shampoo, soap, toothbrush) 75 300
Clothing (underwear, socks, shirts, pants) 75 225
Entertainment (movies, dinner) 50 175
Food (you need to eat!) ONLY have 175
151
Oh, I forgot
You are a single parent with 3 children
So, what can you do?
152
What do you do if you are POOR?

• Welfare
• Government aid to the poor
• Temporary Assistance to Needy Families (TANF)
• In 1996 reform of welfare, which aims to move
  people from welfare dependence to the work force
• Social Security
• Established in 1935 during Great Depression
• Payments to elderly and disabled

153
What do you do if you are POOR?

• Unemployment insurance
• Were employed, but are no longer employed, you
  can collect this
• Workers compensation
• If you are injured during employment
• In-kind benefits
• Goods and services provided for free or greatly
  reduced prices
• Examples food stamps, housing (HUD)

154
What is the difference between

• Medicare
• Americans over age 65
• Disabled
• Poor

• Medicaid
• Some poor who are unemployed or not covered by
  employment insurance

155
What is an Externality?
An economic side effect of a good or service that
generates benefits or costs to a decision

• Positive Externality
• Beneficial side effects
• Swimming, boating, pleasant surroundings

• Negative Externality
• Unintended side effects
• Loss of wildlife, overcrowding, noise

156
What are the Economic Stabilizers?

• 1. Unemployment between 4.5 -5.5
• 2. Constant increase in GDP
• 3. General price levels with low inflation rate

157
Circular Flow Diagram for a Mixed Economy
(Open your Economics books to page 42)
158
Product Market
Factor Market
159
Standards

• 6.1.12AB
• 6.2.12A I
• 6.4.12AB
• 6.5.12D