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Understanding Economic Systems: Command vs. Market

Explore command systems like socialism and market systems like capitalism. Learn about factors influencing economic activity and key questions guiding resource allocation in different economic models.

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Understanding Economic Systems: Command vs. Market

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  1. September 10, 2013 • Review problems from page 20, #1-7. • Begin Chapter 2 Notes ***Homework: Read Chapter 1 Appendix and do problems on p. 27, #1-8. DUE FRIDAY! WE WILL REVIEW THEN!*** Ch. 1 Quiz Thursday Current Event Due Friday

  2. Chapter 2 The Market System and the Circular Flow

  3. Economic Systems • Set of institutional arrangements in response to economizing problem. • Differences in systems exist by: • Who owns the factors of production? • What method is used to motivate, coordinate, and direct economic activity? 2-3 LO1

  4. 1. The Command System • Known as socialism or communism • Government ownership of means to production. • Decisions made by a central planning board. • Include production goals, resource usage, consumer vs. capital goods production, etc. • North Korea and Cuba. 2-4 LO1

  5. September 13, 2013 • Collect Current Event • Review Appendix problems, p. 28, 1-8 • Continue Chapter 2 Notes ***We will review the Ch. 1 Quiz Monday!***

  6. 2. The Market System • Capitalism • Private ownership of resources • Use of markets and prices to coordinate economic activity. • Laissez-Faire or some government involvement. • Economic decisions based on markets • USA, Australia, Switzerland, U.K. 2-6 LO1

  7. Characteristics of the Market System • Private property • Free enterprise & choice • Self-Interest (each unit tries to achieve own goal) • Competition • Markets (brings buyers and sellers together) and prices 2-7 LO2

  8. Technology and Capital Goods • Advanced technology and capital goods are encouraged in a market system. • Specialization • Division of labor (Human specialization; airplane window guy or farmer) • Geographic specialization (Nebraska vs. Florida) 2-8 LO2

  9. 2-9 LO2

  10. September 16, 2013 • Review Ch. 1 Quiz • Continue Chapter 2 Notes: The 5 Fundamental Questions HW: Chapter 2 Problems (p. 44 & 45, #’s 1-4) ***Unit 1 Exam Thursday/Friday*** ***Please bring #2 pencil!***

  11. The Five Fundamental Questions!!! • What goods and services will be produced? • How will the goods and services be produced? • Who will get the goods and services? • How will the system accommodate change? • How will the system promote progress? 2-11 LO3

  12. 1. What Will Be Produced? • Answer: Goods and services that create a profit • “Dollar Votes”- Whatever people are willing to buy. • Method for consumers to determine which goods will be produced and which products and industries survive or fail 2-12 LO3

  13. 2. How Will the Goods Be Produced? Answer: Minimize the cost per unit by using the most efficient techniques (the cheapest way!!!) • Technology • Prices of the necessary resources 2-13 LO3

  14. 2-14 LO3

  15. 3. Who Will Get the Output? • Answer: Those with the ability and willingness to pay! (Demand) • Lawyer: $200 an hour • Janitor: $10 an hour • = Lawyer is able to purchase 20x more of society’s output than the janitor. 2-15 LO3

  16. 4. How Will the System Change? • Changes in consumer tastes, technology, resource prices. • Prices and profit baby, prices and profit. 2-16 LO4

  17. 5. How Will the System Progress? • Society desires economic growth and higher standards of living (greater output per person.) • Answer: Technological advance, entrepreneurs, politicians. • Creative destruction  • Capital Goods accumulation (dollar votes again y’all) 2-17 LO4

  18. September 17, 2013 • Continue Chapter 2 Notes: Invisible Hand, Circular Flow Model, Business Types • Circular Flow Model Video • Ch. 2 problems #1-4 Unit 1 Exam Thursday/Friday Ch. 2 Problems due tomorrow Unit 1 Vocab due Thursday Current Event due Friday

  19. “Invisible Hand” • 1776 Wealth of Nations by Adam Smith • Unity of private and social interests. • Businesses act in own self-interest while also promoting society’s well being. • Virtues of the market system: • Efficiency (use of resources) • Incentives (skills, hard work, innovation) • Freedom (little government coercion.) 2-19 LO4

  20. The Circular Flow System (p. 40) • RESOURCE or FACTOR • MARKET • Households sell • Businesses buy Costs Rent, Wages, Interest, Profits Land, Labor, Capital, Entrepreneur Land, Labor, Capital, Entrepreneur • BUSINESSES • buy resources • sell products • HOUSEHOLDS • sell resources • buy products Goods and Services Goods and Services • PRODUCT • MARKET • Businesses sell • Households buy Consumption Expenditures Revenues LO5 2-20

  21. Businesses • Three main categories of businesses: • Sole Proprietorship • Partnership • Corporation (legal entity) A Deck of Cards………. 2-21 LO5

  22. Shuffling the Deck • Extremely large number of ways to arrange a deck of cards • Arrangement of economy’s resources is even larger • Avoid random outcomes in market due to: • Private property • Rational decisions about property 2-22

  23. Demise of Command Systems • Soviet Union, Eastern Europe, and China • System was a failure • The coordination problem • Set output targets for all goods • The incentive problem • No adjustments for surplus or shortage 2-23 LO4

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