Economics

1. Economics Unit 2

2. Why Did Communism Collapse?Capstone Lesson 6 • The Collapse of communism in the USSR was one of the most important events in the 20th Century • We want to apply economic reasoning to try to explain why

3. Visual 1 • What was the position of the former Soviet Union for much of the 20th century? • The Soviet Union was regarded as one of the two superpowers. • How was the Soviet Union Opposed? • In the Cold War and certain “proxy wars,” including the war in Vietnam, the US and other nations opposed the expansion of communism • What is the Mystery? • Why did the Soviet Union collapse?

4. Visual 2 • Speculate as to whether or not these questions are true or false • Now Read Activity 1 • Now Let’s look back at visual 2 and answer the questions • A. True For much of the twentieth century, nearly one-third of the world’s population lived under communism or socialism • B. True The USSR worked form the premise that only government planners could provide for the overall economic well being of Soviet Society • C. True In a market economy, prices send important information to producers and consumers regarding the relative value of goods and services • D. True In command economies, prices are controlled by the government

5. Solve the Mystery • Soviet authorities assumed that government planners had superior information, enabling them to make better economic decisions that those made by individuals acting on their own behalf. But it was nearly impossible for government planners to understand local circumstances related to the production and consumption of goods and services. Principle 4. • The Rules of the soviet economic system abolished the incentives that ordinarily encourage producers to respond to consumers. First, most private ownership was abolished. Individuals were no longer allowed to benefit economically from the property they owned or worked. Second, under communism, the government owned businesses, and government managers managed businesses to meet government goals, not to make profits. This discouraged managers from responding to the interests of consumers. Principles 3 and 4

6. Solve the Mystery continued • In any economic system, prices send valuable messages to individuals and business owners. In a communist system, prices set by the government distorted the information sent to individuals and businesses. As a result, people often made poor decisions, causing waste and environmental damage. Principles 3 and 4 • Visual 3

7. Visual 4 • Basic characteristics of a market economy • Private Property- Private individuals and groups are the owners of the means of production including factories, farms, and their own labor. • Freedom of Choice- Businesses are free to decide what products to produce, and they may purchase what they need from suppliers of their choice. Consumers are free to spend or save their income in ways they choose.

8. Self Interest- People make choices they judge to be in their own interest. Adam Smith argued that in making such decisions people are led by an “invisible hand” to promote the good of society as a whole • Profit Motive- Businesses are free to earn profits. Profits are viewed as rewards earned by those who take the risks involved in producing goods and services for consumers

9. Markets and Prices- Most exchanges are handled through markets-local, regional, national or international. Market prices are established through the interaction of buyers and sellers. Prices are used to allocate goods and services in the economy. • Competition- Market systems depend on competition to restrain participants as they engage in self-interested behavior. In competitive systems, no one business can control market prices.

10. Limited Government- Market systems require a limited role for government. The government’s regulatory role is restricted by constitutional or other legal limits. Defining and enacting property rights, however is an important obligation of government in a market system.

11. Visual 5 • Basic characteristics of a command economy • Public Ownership- The government is the owner of the means of production, including factories, farms and so forth. • Centralized Decision Making- A central authority such as a bureau, legislature, or government official makes the fundamental decisions about what and how much will be produced.

12. Economic Planning- National economic goals are often an important focus. Objectives are established for each sector of the economy. Objectives are fine tuned to provide instructions for each farm, factory or mine.

13. Allocation by Command- A central authority such as a bureau, legislature or government official makes the fundamental decisions about how goods and services are distributed. Raw materials and labor are assigned to factories, farms and other units of production according to priorities established by government.

14. Why did communism collapse? • Under communism, government was thought to have superior information, enabling it to make better economic decisions than individuals might make acting on their own behalf. The rules of the economic system abolished the incentives (including private ownership and the profit motive) that encourage producers to respond to consumers. Prices and quantities set by the government distorted the information sent to individuals and businesses.

15. Markets • A place or service that enables buyers and sellers to exchange goods and services • Farmer’s Market, Supermarket, Flea Market

16. Barter • Direct exchange of goods and services without the use of money • In order for barter to work you have to have what the other wants. • If I have an item that I want to trade to you for another item, you must want what I have

17. Double coincidence of wants • The situation that exists when A has what B wants and B has what A wants

18. Transaction Costs • The costs involved in making an exchange • If we just were to concentrate on making exchanges through barter without money, we would have very high transaction costs

19. Relative Price • The price of one good expressed in terms of the price of another good. • When people agree to trade or exchange, they must establish a rate of exchange or a price • For example, if a plumber and a doctor agreed to exchange services they would have to establish the value of one compared to the other. In this case they might agree that one hour of the doctor’s services are equal to three hours of the plumber’s services

20. Demand • The amount of a product that people are willing and able to purchase at each possible price during a given period of time, everything else held constant • This is what people are willing and able to buy.

21. Quantity Demanded • The amount of a product that people are willing and able to purchase at a specific price • Key difference demand refers to every price, quantity demanded refers to specific price

22. Law of Demand • The quantity of a well-defined good or service that people are willing and able to purchase during a particular period of time decreases as the price of that good or service rises and increases as the price falls, everything else held constant. • This states that people are going to demand more at a lower price and demand less at a higher price as long as everything else stays constant.

23. Demand Schedule • A table or list of the prices and the corresponding quantities demanded of a particular good or service

24. Demand Curve • A graph of a demand schedule that measures price on the vertical axis and quantity demanded on the horizontal axis

25. Demand Curve • All demand curves slope down because of the law of demand: as price falls, quantity demanded increases vice versa. Everything held constant (with this statement we are assuming that tastes don’t change)

26. Market Demand • Is the sum total of all individual demands for a particular product. • We add together the quantity demanded at each price not the dollars to determine market demand

27. Changes in Demand • A number of factors may influence the demand for a product, and changes in one or more of those factors may cause a shift in the demand curve • An increase in demand is shown by a shift of the demand curve up and to the right • A decrease in demand is down by a shift of the demand curve down and to the left.

28. Increase Decrease

29. Determinants of Demand • Factors other than the price of the good that influence demand-income, tastes, prices of related goods and services, expectations, and number of buyers.

30. Income • Demand for any good or service depends on income

31. Normal Good • Goods for which demand increases as income increases.

32. Inferior Goods • Goods for which demand decreases as income increases, • Ex. Bankruptcy Services, Inexpensive Goods and Services

33. Tastes • Individual Tastes and preferences have an effect on demand.

34. Price of Related Goods • If goods that are similar to the ones you sell go up or down in price, quality etc. that will have an effect on the demand for your goods. • Example. Taco Bell finds that it’s lettuce has e coli poisoning. More people eat at McDonalds

35. Substitute Goods • Goods that can be used in place of each other; as the price of one rises, the demand for the other rises. • Ex. Fords and Chevy’s, Coal and Oil, Steak and Chicken etc.

36. Complementary Goods • - Goods that are used together as the price of one rises, the demand for the other falls. • Ex. CD players and CDs, DVD players and DVD’s etc

37. Future Expectations • Future expectations can have an effect on demand today. What you think you might earn at a later date or if you think an item’s price will rise in the future

38. Number of Buyers • When there are more buyers in a market place- demand will rise

39. Changes in Quantity Demanded • When the price of a good is the only thing that changes the quantity demanded changes but the demand curve does not shift.

40. Supply • The amount of a good or service that producers are willing and able to offer for sale at each possible price during a period of time, everything else held constant.

41. Quantity Supplied • The amount sellers are willing and able to offer at a given price during a particular period of time, everything else held constant.

42. Law of Supply • The quantity of a well-defined good or service that producers are willing and able to offer for sale during a particular period of time increases as the price of that good or service increases and decreases as the price decreases, everything else held constant.

43. Supply Schedule • A table or list of prices and corresponding quantities supplied of a particular good or service

44. Supply Curve • A graph of a supply schedule that measures price on the vertical axis and quantity supplied on the horizontal axis

45. Market Supply • The quantities that each producer supplies at each price are added together to determine market supply.

46. Changes in Supply • A number of factors may influence the supply for a product, and changes in one or more of those factors may cause a shift in the supply curve • An increase in supply is shown by a shift of the supply curve down and to the right • A decrease in supply is shown by a shift of the supply curve up and to the left.

47. Increase Decrease

48. Determinants of Supply • Factors other than the price of the good that influence supply-prices of resources, technology and productivity, expectations of producers, number of producers, and the prices of related goods and services.

49. Prices of Resources • If labor decreases, one of the resources used in producing goods, then supply will decrease and vice versa.

50. Technology and Productivity • If resources are used more efficiently in production, then more of that good can be supplied for the same cost. • Productivity- The quantity of output produced per unit of resource.