Economic Systems

1. A particular set of institutional arrangements and a coordinating mechanism to respond to the economizing problem Economic Systems This spans both Macro and Micro

2. The economizing problem deals with SCARCITY and three basic problems: • What to produce • How much of your resources will you use to produce a good or service • Who will receive (consume) the final product

3. The main differences in economic systems are: • Who owns the factors of production • The method used to coordinate and direct economic activity …3 basic types to understand for economics

4. Capitalism

5. Capitalism (or free enterprise) • Private ownership of resources • Use of markets and variable prices to coordinate economic activity • Self-interest is what incentivizes each agent (households and firms) • Competition among producers acting to incentives is what supplies the economy… No one is in control (anarchy)

6. Capitalism (or free enterprise) • Laissez-faire capitalism is when just the government upholds property rights and creating laws that support the market… Fear you will mess it up • Consumption and profit maximization favored (9/11) • Wages between managers and employees • A Mixed Economy/Mixed Capitalism is when the government promotes economic stability and growth (the 8 economics goals) while still allowing the market to set things on its terms… The market is still dominant

7. http://www.c-spanvideo.org/program/JobLa • 17:30 Letsos!

8. By preferring [his own self-interest] he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. -Adam Smith, 1776

9. The Command System

10. The Command System • Socialism/Trade Unionism (when some producing is controlled by the government, e.g. electricity and other core areas) vs. Communism (when all production is controlled by the government) • Socialism: Wages via negotiation with unions • Communism: Central state dictates all prices and wage levels (state an arm of the communist party)

11. The Command System For below, the focus is on communism • No private property • Central economic plan that decides the answers to the economizing problems • Government owns firms • Determines where resources are allocated • Capital is allocated based on what the center says (innovation from the bottom up is hard… no spare capital to be adventurous) • Equity (all profits distributed) and consumption is equal • Even if there is some ownership, central planning is dominant • Lack of incentives for extra effort, risk taking, and innovation

12. “From each according to his ability, to each according to his need” -Marx, 1875

13. http://www.youtube.com/watch?v=-CvQOuNecy4&feature=related at 1:00 Letsos

14. Traditional orPre-Modern Economies

15. Rigid Social Hierarchies • Even if lowers classes can obtain some goods in their poverty, various prohibitions exists that preserve the top caste’s honor and power (dress codes, arms, medicine, luxury and other status items, etc.) • Life of denial… It is easier for a camel to pass through the eye of a needle than for a rich man to gain entry into heaven • Consumerism looked down upon because everything is done for the nation or religion • Not enough durable resources produced for mass consumption • Trade seen as lowly (Confucius); citizens must be leisurely (Aristotle) • Group solidarity, balance, and hierarchy are the goals

16. Economic Whispers Does anyone want to go back to traditional societies? Why do we only have these three options?

17. What follows is not entirely in the assigned chapters, so the exam will expect you to review your notes for this section (~8% of your test will be marginal analysis)

18. Marginal Analysis and the Three Questions of What, How, and Who WHAT Allocative Efficiency is achieved when each good is produced until its Marginal Cost=Marginal Benefit… What is being produced is what society wants, hence resources are put where they are most preferred

19. Marginal Analysis and the Three Questions of What, How, and Who HOW Efficient Allocation relates to the output of one good can only be increased with decreasing the output of another good Mathematically, such efficiency is realized when there is equality between the ratio`s or proportions of input prices and the inputs’ Marginal Product (MP)

20. RATIOS & PROPORTIONS

21. Good Day!Today is Class #11 You should be: • Getting notes on Marginal Analysis out and reviewing them as we will be promptly completing them • Gathering your “Personal Business Project” to be turned in • Ready for the return of your quizwhich we will go over • Look over everything in the unit that you may have questions over • Preparing for practice problems we will end class with today • Tonight: Study by finding practice tests/videos • Tomorrow: review given, all HW returned, and project likely returns Today: “Gold on the Ceiling” by the Black Keys

22. Instead of memorizing the ratios, I will provide them to you in the problem… MP=Marginal Product k=capital (machinery) l=labor r=rental rate (cost of capital) w=wage

23. When these ratios or proportions are equal, that is when there is efficient allocation (getting equal from labor and capital)… Typical question: If you are paying your laborers $16.00 hourly and they produce 8 shoes per hour, how much should you pay for the rental rate if your machinery produces 50 shoes per hour? • $25 hourly • $50 hourly • $800 over an eight hour work day • $100 over an eight hour work day

24. Marginal Analysis and the Three Questions of What, How, and Who WHO Distributive Efficiency –Those who place the highest relative value on some good or service receive them Consumers (households) must get the most out of their purchases by equating their marginal utility (MU), the additional happiness they get from consuming one more, to per dollar price cost npletsos

25. WHO These ratios based on P (price) must be equal for distributive efficiency Look below for video games and movies

26. Possible Test Questions • D &E. Circular Flow Model • In the factor market, which of the following are true*: • Household and Firms both sell there • Households receive wagers and rents there • Firms can operate without going to the factor market • Only I • I, II, and III • Only II • II and III • Only III • *Assume unless otherwise indicated you are in a capitalist system with perfect competition

27. If you could travel back in time and relive choices, this would assist in the calculation of your- • Opportunity cost because you would better know the options you forewent • Scarcity because you would know what other resources there were • Opportunity cost because you could re-make each decision • Marginal Utility because you would enjoy different things now • Scarcity because you could find different resources A. Scarcity, choice, and opportunity cost

28. Comparative advantage, absolute advantage, specialization, and trade Consider the following simplified production schedule: Staples Paper Country A 50 100 Country B 40 120 Which of the following is true if both countries have the same amount of resources to work with? • Country B has absolute advantage in both items • Country B has comparative advantage in paper • Country A has absolute advantage in paper • Country A has a lower opportunity cost in producing paper relative to staples • Country B has a comparative advantage in staples

29. People either watch movies at home or write poems. They always spend 12 hours per week combined on these activities. It takes 2 hours to watch a movie and 2 hours to write a poem. They also have to spend 1 hour on the trip to Blockbuster each time they want to watch a new movie. Draw the production possibility frontier for poem-writing and movie-watching. What is the opportunity cost of watching a movie?

30. Now Netflix comes along, eliminating the need to spend an hour traveling to rent a movie. In your graph above, draw the new production possibility frontier. What is the opportunity cost of watching a movie?

31. A new drug enables people to function perfectly with 4 hours less of sleep each week. All of this extra time is devoted to movie-watching and poem-writing. Draw the production possibility curve after this change in your graph in Part 1 (pre-Netflix), and say what the opportunity cost of watching a movie is.

33. Give an example of two economic phenomena that would be studied by mircoeconomists?

34. Define the following terms and label them on the production possibilities curve: • Efficiency - • Production possibilities frontier - • Underutilization - • Impossible-

35. All of the following are associated with China’s move • from command to market economy except: • Less competition for jobs • Increased government role in daily life • Unemployment • Privatization • More economic stability

36. Refer to the graphs shown. Nicole has an absolute advantage in ______ and Tom has an absolute advantage in ______. a. books, videos b. videos, books c. both goods, neither good d. neither good, both goods e. There is only comparative advantage in this example