Explorations in Economics

1. Explorations in Economics Alan B. Krueger & David A. Anderson

2. Chapter 2: Comparing Economic Systems • Module 4: Using Resources to Achieve Economic Goals • Module 5: Types of Economic Systems • Module 6: The Modern Market Economy

3. MODULE 4:Using Resources to AchieveEconomic Goals KEY IDEA: Every society must determine how to use its resources to achieve its economic goals. OBJECTIVES: To explain the three basic economic questions. To identify five economic goals that societies pursue. To describe tradeoffs made among the five goals.

4. THE THREE BASICECONOMIC QUESTIONS 1. What should be produced? 2. How should it be produced? 3. For whom should it be produced?

5. What should be produced? • Resources are limited. • TRADEOFFs - If more of some goods are produced, less of others must be produced. Chapter 2: Modules 4,5 & 6

6. How should it be Produced? • Choosing which combination of resources to use in the production of each good and service. • There is more than one way to produce and different ways to use different combination of resources. • Example: assemble parts by hand, or use industrial robots. • Goal - Efficiency Chapter 2: Modules 4,5 & 6

7. For Whom to Produce? • Because people don’t agree about what is fair and what is best, the “For whom?” question creates frequent and heated public debates. • Is the distribution of goods efficient or fair? • Example: Healthcare, Education, Chapter 2: Modules 4,5 & 6

8. SOCIETY’S ECONOMIC GOALS The standard of living is a measure of comfort in terms of the goods and services available. • Economic Goals: • Efficiency • Equality • Economic Security • Economic Freedom • Growth/Sustainability

9. Equality • The idea that is that if there are equal opportunities for quality education and jobs • People end up with unequal outcomes • Outcomes are result of the choices individuals make.

10. Economic Security • Social safety net • Any form of government assistance for those with financial needs • Examples: • Unemployment insurance • workers’ compensation (victims of work related injuries) • social security (retired and disabled) • supplemental nutrition assistance (to put food on the table of low-income households)

11. Economic Freedom • People can make economic decisions for themselves. • People prefer to live in a country where they are free to choose where to live, what goods and services to buy, and what type of work to perform. • Benefits of making best choices are lost if people are not free to make those choices. • Cash is greatest gift - recipient can choose whatever he wants with it.

12. Growth and Sustainability • Ability to continue production indefinitely. • Goal: To sustain that production and the standard of living it supports. • Production levels are unsustainable if they are being used up faster than they become available. • Example: if farmers overwork their land, nitrogen and other nutrients in the soil are depleted, crop production falls.

13. TRADEOFFS AMONG GOALS Tradeoffs force societies to prioritize among economic goals. When the gains from change exceed losses, an improved standard of living is possible without neglecting the goals of equity and economic security.

14. MODULE 4 REVIEW What is… A. Standard of living? B. Equity? C. Efficiency? D. Economic security? E. Social safety net? F. Economic freedom? J. Economic growth?

15. MODULE 5: Types of Economic Systems Organizational structure for addressing what, how, and for whom to produce. Economic Systems: Traditional Economy Command economy Market economy Mixed economy.

16. TRADITIONAL ECONOMIES • Decisions about resources are made by habit, custom, superstition, or religious tradition. • Decisions require very little planning, and people in traditional economies just do what is expected, which is the same as what has always been expected. Examples: Part of Africa, or in traditional agricultural villages, or the Amish

17. COMMAND ECONOMIES Central planners make the important decisions about what, how, and for whom to produce. Communism –political/economic system All resources, property, and businesses are publicly owned and economic decisions are made by the government. Socialism –economic/political system Resources and businesses are privately and publicly owned. Economic decisions made by groups of workers consumers, and government. Examples: China, Russia

18. MARKET ECONOMIES Most key economic decisions made by business owners and consumers. Capitalist system most resources and businesses are privately owned. Free Enterprise system based on private (individual or business) ownership of resources and voluntary exchange.

19. MIXED ECONOMIES Combines a market economy with significant government involvement (command) and some elements of tradition. Governments in market economies evolve into mixed economies by expanding their roles in the pursuit of equity, economic security, and sustainability. Most Democratic, Capitalist countries use a mixed economy (USA, Canada, Mexico, etc.)

20. ECONOMIC SYSTEMS: INCENTIVES, ADVANTAGES, and DISADVANTAGES Incentive: The prospect of a reward or punishment that influences a decision or motivates greater effort.

21. Traditional Economies:Incentives • Social approval for performing well at traditional role • Disapproval for rebelling against traditions or performing poorly.

22. Traditional Economy: Advantages • Tend to provide economic security • Sustainable economy because they tend to grow very slowly • Can achieve relative equitable distribution of goods and services

23. Traditional Economies: Disadvantages • Rarely achieve goals of economic freedom, economic growth, high standard of living. • Equity can be a problem if standards of the community are unfavorable to certain groups, such as women. • Some societies resist the adoption of new technology, such as electricity or the internet that contribute to education, health, and comfort. • Freedom could be limited because your future is predetermined based on your family or the judgment of the village elders.

24. Command Economy:Incentives • come from the government. • Rewards and punishments given to the managers of factories, transportation systems, schools and other key enterprises.

25. Command Economies: Advantages • economic security, central planners guarantee employment by assigning every person to a job that is part of the plan. • Basic needs, such as housing, education, and medical care provided by government free of charge. • Ability to adjust rapidly to changing circumstances by shift resources quickly

26. Command Economy: Disadvantages • Economic freedom is sacrificed - People cannot start a business or change jobs in a command economy without government permission, if at all. • The standard of living is low • few incentives to work hard, innovate, or use resources efficiently • weak economic growth • Often shortage of consumer goods and rationing • Low Equity -High officials, top bureaucrats, and military officers typically fare better in a command system

27. Market Economies • Market economy: most key economic decisions are made by business owners and consumers. • Business owners are free to produce and how to produce it, and business sell their products to whoever chooses to buy them. • The United States is a primary example of a market economy. Along with Canada, England, France, Germany, Japan, and Singapore.

28. Market Economy:Incentives • Gains and losses that follow from the economic choices of business owners and consumers. • Any exchange in a market economy must benefit both sides or it wouldn't be carried out voluntarily.

29. Market Economy: Advantages Higher Living Standards due to: • Availability of desirable goods • Efficient production methods Rapid Economic Growth • They encourage discovery and innovation. More Economic Freedom • People are free to make their own choice about where to work and what to buy with the money they earn • Businesses can decide what to produce and how to produce it.

30. Market Economies: Disadvantages Equity • no central plans or strong traditions to ensure everyone has a job. Resource conservation • When individuals decide how to use resources, they may overlook the effects of their decisions on the environment and on future generations. Corruption and Unethical Behavior • Example: drug companies to rush new medications to the market without adequate testing. * To avoid problems such as these, governments can intervene with laws for the protection of society Mixed Economy

31. Mixed Economy • Combines a market economy with significant government involvement and elements of tradition. • All modern economies are mixed economies. • Example: in the U.S. government agencies make key decision about public services including national defense, education, and police protection. Also, government regulates activities that could present harm to society if left unchecked,

32. ECONOMIC SYSTEMS

33. ECONOMIC SYSTEMS Command Economy Traditional Economy Market Economy Mixed Economy

34. MODULE 5 REVIEW What is… A. Economic system? B. Traditional economy? C. Incentive? D. Command economy? E. Communism? F. Socialism? G. Rationing? H. Market economy? I. Capitalist system? J. Free- enterprise system? K. Mixed economy?

35. MODULE 6: The Modern Market Economy KEY IDEA: In modern market economies, government participation can support market exchanges and improve economic performance. OBJECTIVES: To explain the relationship among households, firms, and markets in a market economy. To explain the government’s role in a market economy. To describe how the government fits into the circular flow model of the economy

36. HOUSEHOLDS, FIRMS,AND MARKETS A household consists of an individual or a group of people who live together and share income, such as you and your family. 1. Households purchase goods and services from businesses. 2. Households provide land, labor, capital, and entrepreneurship (resources) from which goods and services are produced.

37. HOUSEHOLDS, FIRMS,AND MARKETS A firm is a privately owned organization that produces goods or services and sells them to others.

38. THE SIMPLE CIRCULAR FLOW

39. THE SIMPLE CIRCULAR FLOW Product markets are where goods and services are exchanged for money. Factor markets are where resources are exchanged for money.

40. GOVERNMENT’S ROLEIN A MARKET ECONOMY 1. A government can establish and enforce rules that improve market performance. 2. A government can provide important goods and services that private individuals tend not to purchase. 3. A government can help improve economic security, equity, and sustainability.

41. GOVERNMENT IN THECIRCULAR FLOW

42. Government in the Circular Flow

43. Module 6 Review What is… A. Household? B. Firm? C. Circular flow diagram? D. Product market? E. Factor market?