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Adam Smith’s Market Economy

AP Macroeconomics. Adam Smith’s Market Economy. Economic Logic of a Market System. All Economic Systems Allocate Resources. Market Command Traditional. Every Economic System has to answer 3 Questions : 1) What to Produce? 2) For whom to Produce?

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Adam Smith’s Market Economy

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  1. AP Macroeconomics Adam Smith’s Market Economy Economic Logic of a Market System

  2. All Economic Systems Allocate Resources • Market CommandTraditional Every Economic System has to answer 3 Questions: 1) What to Produce? 2) For whom to Produce? 3) How to Produce it? (or when to produce)

  3. Which Economic System? WHAT ECONOMIC SYSTEM? Society will choose an economic system based on goals: Economic Goals & Social Goals • Growth • Employment • Efficiency • Stability • Justice • Equality • Environment • Freedom

  4. Adam Smith(1723-90) • Founder of Free Market Economics • Argued: Free marketsbest promote the social welfare • Governmentshould generally not interfere! “The Wealth of Nations” Published in 1776

  5. "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their owninterest.” “We address ourselves, not to their humanity but of their advantages." Adam Smith Rule #1:Self-interest creates an incentive to work hard Rule #2:Competitionkeeps us honest End Result:An “invisible hand” will guide the economy to the best market outcome for society.

  6. Reading: The Free Market at Work High Prices Scarce Resources

  7. ReviewWealth Creation & Free Market Please buy my Vulture Scarce Resources

  8. Threat of competition keeps people honest Markets naturally self-regulate End result:low prices & many choices/options Government should not Interfere! Adam Smith & The Invisible Hand People follow their own self-interest Invisible Hand

  9. Growth & Efficiency Supply & Demand Price Production Market Economic System Summary HOW WHAT FOR WHOM MARKET SYSTEM BenefitsCosts • Tremendous consumer choice • ↑ career opportunity • Unlimited Upside ($) • Strong incentive to innovate • Low prices & high quality • Creates wealth • Generally self-regulates • High Stress • ↑ incentive to cheat • ↑ inequality (rich-poor gap) • ↑ environmental impact

  10. Karl Marx 1848 Command Econ Systems • Soviet Union “adopts”command economic system • i.e. communism • General Philosophy: • Government controlled economy (centrally planned) • stressed equality & the common good (collective society) • Economic Incentive to innovate, work hard ? • Work hard for the “collective” good of society • Shortage of a good => what happens?

  11. Self-Regulation vs. Central Planning • Market Economy • Command Economy Shortage of A Good? Invisible Hand

  12. Economic Systems Trade-offs • Efficiencyvs. Equity • Free markets systems focus on efficiency • Command systems focus on equity • Efficiency means society gets the most from its scarce resources • Equitymeans the benefits of scarce resources are distributed fairly in society (not necessarily equally!)

  13. Growth & Efficiency Supply & Demand Price Employment Stability Gov’t or Central Planner Need/ Necessity Equality Need [Tradition] 3 Questions for each Economic System HOW WHAT FOR WHOM “to produce” “to produce” “to produce” Economic System MARKET COMMAND TRADITIONAL

  14. Crash Course Economics Video: Economic Systems (10 minutes) Market Systems vs. Command Systems https://www.youtube.com/watch?v=B43YEW2FvDs

  15. Traditional Economic System • Designed to preserve culture of society • Change occurs very slowly • Gov’t uses strict laws to enforce behavior CHINA

  16. Bhutan Video: Traditional Economy Gross National Happiness https://www.youtube.com/watch?v=sAtMqwh21Eo 6 minutes

  17. Bhutan June 2011 Largest City Typical Village Music Video

  18. Summary • Market systems stresscompetition • Work “individually” in your own “self interest” • Invisible hand regulates economy • Command systems stressequality • Work “collectively” for the common good • Government centrally plans economy • Traditional systems stresspreservation of culture • Government maintains culture of society • Stability more important than efficiency

  19. Bhutan June 2011 Typical Village

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