3 Questions & Economic Systems

1. 3 Questions & Economic Systems AP Microeconomics

2. Need for Economic Systems • Scarcity necessitates choices, how society organizes itself to address this problem is known as its economic system. • Every economic system must make these choices or answer these questions: – What to produce? – How to produce? – For whom to produce? • most controversial • and the one question that you will now confront . . .

3. Who Gets the Candy Bar? • Let’s brainstorm ideas on how to determine who will get the candy bar…

4. Economic Growth • Increased production of goods and services over time • Measured by changes in the level of real Gross Domestic Product • Standard of living: health, literacy, life expectancy, etc.

5. Sustainability Everything that we need for our survival and well-being depends, either directly or indirectly, on our natural environment

6. Economic Equity Some measure of fairness Overall distribution of income Equal opportunity or equality of outcomes

7. Economic Freedom Freedom of consumers to decide how to spend or save incomes Freedom for workers to change jobs or join unions Freedom for people to establish new businesses or close old ones

8. Economic Stability/Security • Stable prices (avoid inflation or deflation) and full employment (using all of an economy’s scarce resources, particularly labor) • safety net: social security, welfare

9. Economic Efficiency Minimize waste Produce the goods and services people want most Economize resources in production of goods and services so real costs of production are as low as possible

10. What’s Your Priority?

11. So, Who Gets the Candy Bar? Allocation Mechanisms • Lottery • First come • Market/Price • Command/Planner • Force • Share • Need

12. Three Fundamental Resource Allocation Methods → Economic Systems • Traditional • Market • Planning

13. Traditional Economies

14. Economic System: Rules about how resources are allocated in a particular country or group of people. Market Economy: An economy that relies on a system of interdependent market prices to allocate goods, services, and productive resources and to coordinate the diverse plans of consumers and producers, all of them pursuing their own self-interest. Command Economy: An economy in which most economic issues of production and distribution are resolved through central planning and control.

15. The Market Economy • Voluntary exchange between buyers & sellers • The Three Questions Answered: • Buyers determine the WHAT? • Sellers determine the HOW? • Income depends on production the For WHOM? • Prices are the signals or communication tool

16. Characteristics of a Market Economy • Private property • Freedom of enterprise and choice • Motive of self-interest • Competition • System of markets and prices • Limited government • Rule of law

17. The Centrally-Planned (Command) Economy • Economic decisions made by Government • The Three Questions Answered: • Central Planners decide the WHAT? • Central Planners decide the HOW? • Central Planners decide for WHOM? • Prices are set by planners

18. Characteristics of a Command Economy Turkmenistan • Public ownership • Centralized decision making • Economic planning • Allocation by command Cuba North Korea Iran Libya Burma

19. http://www.mbaknol.com/category/global-business-environment/

20. Entrepreneurship in the US Economy Student Readings p. 20

22. In Reality all Economic Systems are a MIX or Mixed Model System • …but are based on either a Command basis or Market basis Hong Kong Early 1980s N. Korea France Poland China Cuba USA UK Centrally Planned Free Market Early 2000s UK USA China Cuba Poland France N. Korea Hong Kong

23. Command, Free, or Mixed Market? Minimum wage laws are created. The economic planning function is centralized. The government sets quotas for production. Consumers buy goods, and producers raise prices in response to greater demand.

24. Command, Free, or Mixed Market? New suppliers in India sell products in the United States at a fraction of the price of American producers. Workers have a lifetime job. Prices are determined by a third party agency. Self interest is the driving force.

25. How do Market/Command systems prioritize the goals?