Vocabulary

• Adam Smith- Father of capitalism. He argued his beliefs in his book “The Wealth of Nations”

• Karl Marx- Father of communism. Advocated the violent revolution of the working class. He argued his beliefs in his book “The Communist Manifesto”.

• Laissez-faire- French term meaning “hands off”. It refers that an economy functions best when the gov’t stays out of it.

• Consumer Sovereignty- Means the consumer is the “King” of the market and ultimately decides what is produced.

• Keynesian Theory- Advocated by John Maynard Keyes, he believed the gov’t should decrease taxes and increase gov’t spending. Could lead to massive debt!

Warm Up• Why do people and businesses make investments?• Why would a business invest in capital goods?• What are examples of investing in Human capital?• Why would employers invest in their workers

education level?• What do businesses use to figure out how much to

invest?• How do producers find the opportunity cost of

investment?

Warm Up

• How do businesses determine what to produce in our economy?

1. Resources that could be used for a greater benefit at a later time is called what?

A. ProductivityB. InvestmentC. Capital goodD. Diminishing returns

2. In order to increase production and profits, Mark invests thousands of dollars in a new machine that assembles lawn mower engines for his company. The machine which Mark has purchased is what?

A. An example of improved trainingB. An example of diminishing returnsC. An example of capital goodsD. An example of recycling

Economic Systems

Traditional Economy• Produce what has been

produced in the past.

• Laborers produce just what they need to survive.– Have little opportunity for

economic advancement.

• A small wealthy class controls the factors of production.

• Not common today.

Communist-Command Economy• Karl Marx wrote The Communist

Manifesto in which he believed the working class would rise up and establish socialism.– When gov’t controls all capital and

owns all property.

• Communism– When resources are owned by

everyone, gov’ts ultimately disappear, and income is distributed according to need rather than production.

• No country has ever developed true communism– China, Cuba, North

Korea• The governments of these

countries control the economy through socialist principles

• Fails time & time again

Command Economy • Gov’t ownership of the factors of

production.– Gov’t determines what is produced,

how much it costs, and how it will be distributed.

• Distribution is based on equity (In Theory).• Equally among citizens

• Laborers do not have a say their jobs or working conditions.

• Proven to be failures• Productivity is based on a sense of duty not

financial gain• Less efficient than market economies

Southeast Asia

Market Economy • Market economy

– Producers are free to produce what they choose and consumers are free to consume what they choose to consume.

• Profit motive– Incentive to produce what

consumers want b/c they will make money.

• Consumer sovereignty– Producers will decide what to

produce based on how much consumers demand the product.

Adam Smith & Market Economy• Wealth of Nations

– States that the market is led by incentives.

• “Invisible Hand”– Competition– Private property– Free enterprise

• Freedom to buy/sell what one wishes

• Capitalism– Factors of production are privately

owned – Producers decide what to produce

based on what we demand– Producers are therefore motivated

to make the best product

Laissez-faire

• Since the U.S. gov’t limits free enterprise, it is not a perfect market economy.– Minimum wage– We are known to have a mixed

economy

• Laissez-fair– “Hands off”– The gov’t should stay out of the

economy.

Mixed Economies

• Combine market and command together

• Most countries have this (USA)– Countries differ in which

economy they most resemble

– The U.S. is closest to a free market society

Keynesian Theory

• Deficit spending– Belief the gov’t should

increase spending and decrease taxes.

– When the gov’t spends more money than it has.

Which Economy is it?

• State planners in Equalia meet to decide what the country should focus on producing. After deliberating they decided to use their limited resources to produce automobiles instead of other consumer goods, such as electronics and clothes. The state planners passed down their decision to factories, and allocated to them the raw materials, workers, and other resources needed to produce automobiles. Factories were then told how much to produce and who the products should be shipped to.

• Command Economy

• In Petoria, business owners decide what to produce, how much to produce, for who to produce. The CEO of Crazy Eddie’s recently decided to increase production levels of the company’s newest MP3 player model, and at the same time decrease production levels of their most popular CD player. The reason for the emphasis on MP3 players is that demand for CD players has decreased dramatically as MP3 technology has taken over the market. Simply put there is more profit to be made in the MP3 market.

• Market

• In Hooville, people rarely engage in market transactions. For the most part, they do not need to. Families grow their own vegetables and raise their own animals or hunt to get meat. Certain times get tough for people in Hooville, like when the winters are particularly cold or animals change their migration patterns. For this reason, it is important that families stock up in “good times” and develop relationships with neighbors with whom they can share and trade.

• Traditional

In Springfield, business owners make most economic decisions. As long as they can abide by fair trade policies, they can decide what to produce, how to produce, and for whom to produce without government intervention. These decisions are made by business owners based on what happens in the market. For example, a computer manufacturer recently developed a new video gaming system, but decided not to release the system to the public until it was closer to the holidays because it believed anticipation among customers would allow the company to charge a higher price for the system.

Mixed Economy

Free Enterprise System• Voluntary Exchange– Individuals and businesses

freely choose to exchange goods for something else of value.• The goal of consumers is to

buy the goods they want/need at as low a cost as possible.

• The goal of producers is to sell the goods they produce as high a price as possible.

Effects of Free Enterprise System• Private Property

– Factors of Production are owned by private citizens

• Encourages an increase in productivity and efficiency by producers– Encourage innovations and

inventions• Ex: assembly line &

cotton gin – Specialization/Division of

Labor

Gov’t Role in Free Enterprise System• Limited gov’t interaction– Allows the market to determine

what will be produced and at what price it sells.

• Patent – Guaranteed ownership and

control of an invention.

• Copyright – Legal right granted to a writer for

exclusive publication, production, sale, or distribution of written work.

Disadvantages of Free Enterprise System

• Offers less security – Failed businesses– Unemployment, full

employment (command economies) is not guaranteed

– No equity• People’s economic status is

not determined by the government but rather how hard they work

• Many different social classes

reflection• How would you describe a traditional economy?• How do producers decide what to produce in a market economy?• Who is considered the father of capitalism? What book did he write?• What does Adam Smith refer to as the “invisible hand?• Under capitalism, who owns the factors of production?• What id the goal of producers and individuals in a free enterprise system?• How does competition affect the free enterprise system?• What are disadvantages of the free enterprise system?• Who is considered the father of communism? What pamphlet did he write?• What type of economy goes along with communism?• Who controls the factors of production in a command economy?• What is the goals of communism (command economy?)• What type of economy does the USA have?• Summarize the Keynesian Theory.

Closing?

• Give one fact that describes each of the 4 economies we have discussed: Traditional, Command, Market, & Mixed