Chapter 2 Economics

• Examples of Things the government of a command economy controls:
  • Which businesses can operate in a city.
    • What they should produce and how much.
  • Who has jobs and set work hours.

Socialism and Communism

• Most modern command economies were influenced by Karl Marx, a 19^th century German philosopher, historian, and economist.
  • Marx believed that all of history is a struggle between classes.
  • He experienced the struggle between great industrial factories and the workers who exchanged their labor for wages. 
  • Industrialists grew rich and the workers stayed poor.
  • Marx predicted the workers would overthrow this system and transfer ownership of the factories to public hands. 
  • With the means of production owned by the government, the class struggle would be resolved and all citizens would share the wealth.
• Socialism:  An economic system in which the government owns some or all of the factors of production, developed from the ideas of Marx.
• Communism:  A more extreme form of socialism in which there is no private ownership of property and little or no political freedom.
  • Communism is sometimes called authoritarian socialism.
    • Authoritarian:  Requires absolute obedience to those in power.

QUESTION:  How are socialism and communism similar yet different?

Similar:  Both involve government control of economy.

Different:  Socialism can exist in a democracy, but communism is authoritarian.

Impact of Command Economies:

Advantages:

• Seek to provide for everyone (even those who are sick and no longer productive)
• Leaders use the nation’s resources to produce items that may not make money in a market economy (like medicine).

Disadvantages:

• Central planes have little understanding of local conditions so their economic decisions are frequently misguided or wrong.
• Workers have little or no motive to improve their productivity since they will be paid the same regardless.
• Because there is no private property, there is no motivation for workers to use resources wisely.
• Shortages due to prices being set lower.
• Individual rights are extremely limited.

Estimates suggest that the deeply flawed polices of command economies are responsible for more deaths than two world wars.

Homework:  Imagine you are a teenager who has moved from a traditional farming economy to an industrialized command economy.  Write a letter to your family back home explaining some of the most startling differences you have seen.

Today’s Goal:  Market Economies

Learning Targets

• I can describe what a market is and how it works.
• I can identify the main features of a market economy and explain its advantages and disadvantages.
• I can analyze how the circular flow mode represents economic activity in a market economy.
• Bell Work: Review this chart (May want to write this in your notes)

Chapter 3:  Market Economies

Market Economy:  an economic system that is based on individual choice and voluntary exchange.

• The United States is NOT a “pure” market economy because government intervention is inherent because we are a democracy, ruled by the people through representation…not ruled by the market.

Fundamentals of a Market Economy

Key Concepts:

• Private Property Rights: The rights of individuals and groups to own property, businesses, and resources.
  • Property in economics means everything an individual owns.
  • Airplanes: you owned the paper and machinery.
• Market:  any place where people buy and sell goods and services.

Limited Government Involvement:

• Laissez Faire: The principle that the government should not interfere with the market place.
  • French for “leave things alone”
  • Airplane=You were free to create whatever kind of airplane you wanted as long as it looked like an airplane.

• Capitalism:  an economic system that is based on private ownership of the factors of production
  • Operates on the belief that produces will create goods and services consumers demand on their own.
  • Airplane=you were responsible for the factors of production and had to use entrepreneurship to find the best way to use your resources effectively.  This way you could be successful.
• Laissez faire capitalism is a market economy in its pure form.
  • There are no pure market economies-all real-world market economies have some kind of government involvement.

Voluntary Exchange in Markets

• Voluntary Exchange:  trade in which both traders believe that what they are getting is worth more than what they are giving up.
• The benefits will outweigh the costs.
• In market economies most trades is based on exchange of a product for money rather than another product.
• Profit:  the financial gain a seller makes from a business transaction
  • Airplanes:  If you were selling the planes you would want to make more money then you spent on them.

Competition and Consumer sovereignty

• Competition: the effort of two or more people acting independently to get business by offering the best deal
  • Competition acts as a control for self-interest guiding the market toward a balance of higher value and lower prices.
  • Airplanes=Each team had their own ideas on how to win.
• Consumer Sovereignty:  the idea that consumers have unlimited control over what is produced because they are free to buy what they want and to reject what they don’t want.
  • Consumers have the ultimate control of what is being produced.

Specialization and Markets

• Specialization:  a situation in which people concentrate their efforts in the areas in which they have an advantage.
  • Airplane=Certain people made the planes, certain people decorated the planes, certain people threw the planes, certain people counted the planes, etc.
  • Allows people to trade what they can most efficiently produces for goods and services produced by others.
  • Example:  Your parents work at a specialized job (banker, retailor, welder, doctor, teacher, etc.)  Most of what they do is specialized to their field of expertise.  By earning money from this specialization, they can buy items that others specialize in (food, clothing, etc.)
  • Specialization leads to higher quality and lower priced products.

Today’s Goal:  Modern Economies in a Global Age

• Learning Target
  • I can identify the main characteristics of a mixed economy.
  • I can understand why most modern economies are mixed economies.
  • I can explain why modern economies are becoming increasingly global.
• Bell Work:  Journal – We have looked at 3 types of economies in the last few days. In your opinion, which one is the best?  Why?

Circular Flow in Market Economies:

Key Concepts:

• Circular Flow Model: a visualization of how all interactions occur in a market economy
• The model represents two key economic decision makers:  households and businesses AND the two markets where they meet: goods/services and resources.

Product Markets:  the market where goods and services are bought and sold.

• Whenever or wherever individuals purchase goods or services.
• The suppliers of product markets are businesses, which offer goods or services for sale and use the money they earn from the sales to keep their businesses going.

Impact of Market Economies

Advantages:.

• Economic and political freedom
  • Individuals are free to make their own economic choices.
  • Individuals are free to develop their interests and talents in word they find satisfying, rather than being assigned to jobs.
  • The political process is freer since the government does not have a heavy hand to control the economy.
  • Responsive to changes in conditions and can accommodate to them more quickly.
  • Better economic decisions and productivity.
• Profit
  • This is a key factor of a market economy.
  • Resources need to be allocated efficiently since inefficiencies would result in lower profits.
  • A reward for hard work and innovation.
  • Encourages competition leading to higher quality products and lower prices.

Disadvantages:

• In a pure market economy the economic good of the individual is the primary focus. 
• A pure market economy has no mechanism for providing public goods and services because it would not be profitable to do so.
• No security to those who cannot be economically productive.
• Cannot prevent unequal distribution of wealth which could lead to unequal opportunities.

Why did so many societies feel it necessary to adopt some level of government involvement in market economies?

They felt they needed to provide public goods and economic security, and regulate economic activities.