Chapter 2.1 Economics

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Chapter 2.1 Economics

• Economic Questions and Economic Goals
• (p.23-26)

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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?

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

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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?

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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

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Market Economy

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

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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

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Command Economy

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

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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

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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 dont focus on
  any)

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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.
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Economic Theories (2.2)

• Adam Smiths Capitalism v. Karl Marxs Communism

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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

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Karl Marx The Voice of the Command Economy

• Explained in his book The Communist Manifesto
• The command economy requires
• Power lies in the hands of the government
• Cooperation working towards a common goal as
  one nation

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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

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Topic WorkersPick 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

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Topic ProductionWhich 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

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Topic PropertyPick which side is Marx or Smith

• I have never known much good done by those who
  trade their property for the public good, rather
  people should barter and trade among themselves

• Abolish all private property and you will find
  the meaning of peace

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Circular Flow Diagram (2.3)

• Households, Firms, Factor and Product Markets,
  Government Influence on the Economy, Mixed
  Economies

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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

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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
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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 and
  services

The food bought at a grocery store counts as a
product produced by a firm or business that is
bought at a product market
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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

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