4 Economic Systems of Gov’t:

1. 4 Economic Systems of Gov’t: • Market Economy • Command Economy • Mixed Economy • Traditional Economy

2. Economic Systems • A country’s economic system answers the 3 basic questions: • A. what to produce • B. how to produce it • C. for whom it is produced

3. Market Economy-also known as capitalism-these decisions are made in free markets by the interaction of supply and demand. • Private citizens own the factors of production-not the gov’t • Businesses are driven by profit-motive and decide what to produce • Consumers make their own decisions about what to produce • Supply and demand interact to set price; producers and consumers base their decisions on price • A market economy is decentralized-decisions are made by all the people, not just a few.

4. Role of gov’t in US Economy • Provides public goods and services • Regulates businesses to make sure markets stay competitive • Works to reduce negative externalities and increase positive externalities

5. Command Economy-central gov’t makes the major economic decisions • Individuals have few choices and little influence over the economy • Also called controlled economy, socialism, or communism • Gov’t owns most productive resources, especially land and capital • Gov’t makes the 3 basic decisions • Gov’t fixes the wages of workers and sets prices • Command economies can be very ineffieient resulting in slower growth and lower GDP (Gross Domestic Product). • Two leading command economies are Cuba and North Korea.

6. Mixed Economy-combines basic elements of a pure market economy and a command economy. • Combines private ownership or property and individual decision-making with gov’t intervention and regulations. • The US is a mixed economy-where individuals make decisions based on market phenomena. • Our gov’t makes laws to protect private property and regulate areas of business.

7. Today, many nations have changed from command economies to more of a market economy. • For example, countries in the former Soviet Union and even China are making strides toward a more market economy. • Command economies were not able to achieve the economic growth that market economies had. • The Soviet Union broke into separate countries in 1991 b/c Communist leaders cound not keep the economy going. • It has been a difficult transition for the Russian economy.

8. State owned factories have been switched to private ownership, stock markets have been created, etc. • In the 1980’s, China began to introduce market reforms and began to convert factories to private ownership. It also set up a stock market. • This has resulted in a growing economy over the past 30 years.

9. Traditional Economy-economic decisions of what, how, and for whom to produce are based on custom or habit. • The country’s economy and way of life are passed down from generation to generation. • Decisions are usually made by a small group, tribe, or religious sect. • They are usually poor, developing countries with a high rate of population growth and a declining GDP. • People have a smaller share of what the economy produces.

10. Traditional economies are usually landlocked and do not have access to ocean trade; others lack many natural resources • Many developing traditional economies have suffered through civil wars that have destroyed roads, bridges, factories and other resources. • Some traditional economies borrow large sums of money to spur economic growth which means they owe more money than the GDP they produce in a year.

11. Assignment: Due 11/09/09 • Fold the legal size paper so that you have four quadrants • Label each quadrant with one of the four economic systems of gov’t • Illustrate each of the economic systems • Illustrations must include color

12. Systems of Government • Quiz answers

13. Anarchy__1. absence of government Communism__2. authoritarian party that controls the economy; government of China and the former USSR Theocracy___. government where the ruler is considered divine Dictatorship__4. government that takes over by force or fear Democracy__5. government based on the rule of the people Monarchy__6. government ruled by an individual who is usually a king or queen Autocracy__7. rule by one person Oligarchy__8. rule by a group of persons Authoritarian__9. type of government where power is held by an individual or group who is not accountable to citizens Totalitarian__10. type of government where the ruler changes all areas of the government or country • 11. Identify a dictator and his country. Castro/Cuba; Hitler/Germany; Hussein/Iraq • Name the type of government in which the federal and state governments share power. federalism

14. ECF Records Company • ECF records produced 5,000 CDs last month. It sold each of these CDs for $10. The rent for the studio was $3,000/month. Power to operate the machines cost $500. The costs for the musicians were $12,000. The commercial printer cost $400 per month to rent. The materials used to produced the CDs, cases, and packaging were $4,000.

15. 1. Identify the capital good(s) mentioned above. • Any machines • Commercial printer • Materials used to produce the CD’s, cases, and packaging • Studio

16. 2. Identify other resources used for production. • Musicians • Power

17. 3. Were there any natural resources (land) used? If so, what? • Approximately half an acre of land

18. 4. Identify the fixed costs; calculate the total fixed costs. • $3,000 Rent • $400 Printer Rent • $3,400 = total fixed cost

19. 5. Identify the variable costs; calculate the variable costs. • $500 Power • $12,000 Labor • $4000 Packaging and Materials • $16,500 total variable cost

20. 6. What is the total cost? Calculate the total cost. • Total Cost- addition of variable and fixed costs • $3,400 • $16,500 • $19,900 = Total Cost

21. 7. Define average total cost; calculate the revenue generated. • Average total cost- when a business divides the total cost by the quantity produced to calculate cost per good. • $19,900 divided by 5,000 CDs = $3.98 per CD produced

22. 8. Define revenue; calculate the revenue generated. • Revenue- incoming funds • 5,000 CDs multiplied by the $10 cost of each CD = $50,000

23. 9. Define profit; calculate the profit. • Profit- the amount of revenue left after total costs have been deducted • $19,900 subtracted from $50,000 = $30,100

24. 10. Define opportunity cost. • Opportunity cost- what is given up when another choice is made

25. What would be the opportunity cost of purchasing four CDs for someone who loves cheeseburgers if a cheeseburger costs $5? • 8 cheeseburgers

26. 12. If it costs $19,901 to produce 5,001 CDs, what is the marginal cost of producing another CD? • 5,000 = $19,900 • As compared to • 5,001 = $19,901 • Then the one extra CD costs $1.00 as compared to the $3.98 per CD for the first 5,000 CDs produced

27. 13. If the selling price remains constant, what is the marginal benefit of selling another CD? • $3.98 - $1.00 = $2.98 is the marginal benefit of selling another CD

28. 14. Assuming the factory can sell additional CDs, would it be profitable to produce more? Why or why not? • Yes, it would be profitable to make more CDs because the additional CDs are much less expensive to produce and will result in additional profit per CD.