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. Economic Basics Summary • Land, labor, capital, and entrepreneurship are scarce. • Which means we need to make choices about what to produce. Choices reflected in the PPF. • PPF can grow if new natural resources are discovered, or population grows, or more capital is created. • But the real boost comes from technology and human capital enables us to use resources more effectively. • Creates the possibility of economic growth – an increase in the amount of goods and services produced.

4. Key Ideas • Needs and wants are unlimited, but resources are scarce. Economics studies decisions under conditions of scarcity. • Cost / benefit analysis helps us make economic decisions choosing the highest net benefit. • Cost is best measured by opportunity cost. • Marginal benefit and cost analysis helps us decide whether to do one more. Important to ignore sunk costs.

5. Key Ideas - 2 • Production possibilities frontier shows economically efficient choices in what we can produce. Increasing opportunity costs cause the curve to bow out. • Economic efficiency means we can only produce more of one thing by giving up some of another. • Resources include land, labor, capital and entrepreneurship. • Economic growth is the increase in goods and services produced (PPF moves outward). • Human capital and technology help use resources more efficiently and promote economic growth.

6. 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.

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

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

9. Summary Usually cannot be best at one goal without giving up some of another. Example: economic freedom vs. economic equality. Tradeoffsforce societies to prioritize among economic goals.

10. MODULE 4 REVIEW What is… A. Standard of living? B. Equity? C. Efficiency? D. Economic security? E. Social safety net? F. Economic freedom? G. Allocated? H. Equality of outcome? I. Equality of opportunity? J. Economic growth?

11. MODULE 5: Types of Economic Systems KEY IDEA: A country’s economic system determines how well it can achieve each economic goal. OBJECTIVES: To explain what an economic system is and how incentives play a role. To describe the features of a traditional economy, a command economy, a market economy, and a mixed economy.

12. ECONOMIC SYSTEMS AND INCENTIVES An economic system is an organizational structure for addressing what, how, and for whom to produce. An incentive is the prospect of a reward or punishment that influences a decision or motivates greater effort.

13. Economic System Overview Economic Systems Chapter 2: Modules 4,5 & 6

14. Lower Moldovia

15. Lower Moldolvia team prepares a “scorecard” based on their ranking of the five goals. Create a list of questions you want to ask the competing economic systems. • Traditional, Command, Market, Mixed and Crony Capitalism teams prepare a power point presentation to Lower Moldolvia on the advantages of their system. • Resources – Explorations – Module 5, Google Phase 1 – Econ Debate

16. mgehman@livingston.org

17. Round 1: Lower Moldovia – let each team present for 3-5 minutes • Round 2 : Each team has 2 minutes to respond to comments by other teams. • Lower Moldolvia team votes on their preferred economic system. • Teams complete back side of the economic systems chart. Phase 2 – The Debate

18. TRADITIONAL ECONOMIES In a traditional economy, decisions about resources are made by habit, custom, superstition, or religious tradition.

19. COMMAND ECONOMIES In a command economy, central planners make the important decisions about what, how, and for whom to produce. Communism is a political- economic system under which all resources and businesses are publicly owned and economic decisions are made by central authorities. Socialism is an economic system under which most resources and businesses are publicly owned and economic decisions are made by groups of workers and consumers.

20. MARKET ECONOMIES In a market economy, most key economic decisions are made by business owners and consumers. In a capitalist system, most resources and businesses are privately owned. A free- enterprise system is an economic system based on private(individual or business) ownership of resources and voluntary exchange.

21. MIXED ECONOMIES A mixed economy combines a market economy with significant government involvement and elements of tradition. Governments in market economies have expanded their roles in the pursuit of equity, economic security, and sustainability.

22. Crony Capitalism • A economy where success in business depends upon a close relationship with government officials. • And where the government provides special advantages such as licenses, capital, or contracts to certain firms. • The government may favor certain businesses to promote economic growth. In other cases, the favoritism may simply reflect corruption.

23. Recap

24. ECONOMIC SYSTEMS

25. Country Project – Teacher’s Outbox – Economics Spring 2014 • Instructions: This is a two part, graded exercise to apply your new knowledge of economic systems to analyze the economy of another country (of your choice. • Part 1 (10 pts) requires you to research another country’s economic system and identify similarities and differences to the USA. • In Part 2 (15 pts.) involves writing a letter to a friend providing your evaluation of the country. • Save as Economics – Country Project – Your Name in Mr. Gehman’s In Submit – folder Economics – Spring 2014 • Project is due by end of day 3/7 Chapter 2: Modules 4,5 & 6

26. Research Resouces • CIA World Fact Book • Economy Watch (world economy tab) • Simply googling for information can turn up useful stuff. For example “Russia social safety net” turns up several articles on their broken down pension system. CIA Fact Book Economy Watch Chapter 2: Modules 4,5 & 6

27. Key terms • GDP – gross domestic product is the value of all the goods and services produced by an economy. • GDP per capita – is the GDP divided by the number of people. It gives an indication of the standard of living. • GDP by sector – government, household consumption and investment (machinery, etc.) • GDP growth is the annual percentage growth in GDP. Higher is better. Use five or ten year averages, not annual. Chapter 2: Modules 4,5 & 6

28. More statistics • Income distribution – is what percent of income goes to each level in society. • Unemployment rate – is the % of people that want to work who can’t find jobs. Economies with slow growth usually have high unemployment rates. • Life expectancy and literacy given an idea of the quality of life in a country Chapter 2: Modules 4,5 & 6

29. 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?

30. 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. To describe the tradeoffs different countries make in designing social safety nets.

31. 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.

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

33. THE SIMPLE CIRCULAR FLOW

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

35. 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.

36. GOVERNMENT IN THECIRCULAR FLOW A public good is a good or service that can be consumed by many people at once and that other people can’t be prevented from using. Transfer payments are expenditures for which the government receives no good, service, or resource in return.

37. Government in the Circular Flow

38. INTERNATIONALPERSPECTIVES Countries have to decide if they want a strong safety net or a weak one. More public goods and transfer payments tend to increase the tax rate.

39. Module 6 Review What is… A. Household? B. Firm? C. Circular flow diagram? D. Product market? E. Factor market? F. Factor payment? G. Property right? H. Public good? I. Transfer payment? J. Regulation?