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Mr. Lejano’sDesk

Pay People for How Much Work They Get Complete

Pay People Based on Effort

Everyone Should

Get Paid The

Same

People who are famous should get paid more

4 SidesStand in front of the wall that

you think is best

Economic Theories & SystemsEconomic Theories & Systems

Feb 18Feb 18thth, 2014, 2014

3 Basic Questions an Economic 3 Basic Questions an Economic System Must AnswerSystem Must Answer

WHAT to produceWHAT to produceHOW to produceHOW to produceFOR WHOM to FOR WHOM to produceproduce

AllocationAllocationDetermine what needs or Determine what needs or

wants should be addressed &wants should be addressed &Determining what (& quantity) Determining what (& quantity)

factors of production will go factors of production will go towards addressing themtowards addressing them

Adam Smith & the Adam Smith & the Market EconomyMarket Economy

Adam SmithAdam SmithEconomist who believed the 3 Basic Economist who believed the 3 Basic

Economic questions would be Economic questions would be answered by…answered by…

The MARKET (interaction between The MARKET (interaction between producers & consumers) itselfproducers & consumers) itself

The The ““Invisible HandInvisible Hand”” – The – The MARKET will correct itself MARKET will correct itself

Market Economy/Capitalism: Market Economy/Capitalism: Key ComponentsKey Components

Free CompetitionFree CompetitionProfit IncentiveProfit Incentive

How? Self - InterestHow? Self - Interest

ProducersProducers Self – Interest:Self – Interest:

MAXIMIZE PROFITMAXIMIZE PROFIT Profit = (Quantity Sold Profit = (Quantity Sold

X Price) - CostX Price) - Cost

How can producers maximize How can producers maximize their profits?their profits?

A)Produce products or services A)Produce products or services that consumers wantthat consumers want

B)Produce them efficiently (ie. B)Produce them efficiently (ie. Quickly and cheaply)Quickly and cheaply)

C)Sell them at prices that C)Sell them at prices that consumers are willing to payconsumers are willing to pay

What if they donWhat if they don’’t?t?

Competition & time Competition & time will eliminate the will eliminate the business from the business from the marketmarket

ConsumersConsumers Self – Interest: Acquire desirable GOODS Self – Interest: Acquire desirable GOODS

& SERVICES for as low a price as & SERVICES for as low a price as possiblepossible

Responsibility: Must be willing to pay a Responsibility: Must be willing to pay a REASONABLE price for G & S they REASONABLE price for G & S they wantwant

If unwilling, G & S will not stay in If unwilling, G & S will not stay in business and consumers will not get what business and consumers will not get what they wantthey want

Invisible Hand - Market MechanismInvisible Hand - Market Mechanism

Competition & self-Competition & self-interest will interest will automatically lead to automatically lead to prices and output that prices and output that best serve societybest serve society

Laissez FaireLaissez Faire(French: (French: ““do not interfere/hands do not interfere/hands

offoff””) ) doctrine that an economic system doctrine that an economic system

functions best when there is no functions best when there is no interference by gov’tinterference by gov’t

Followers of Laisez Faire Followers of Laisez Faire believe the MARKET can believe the MARKET can allocate resources & correct allocate resources & correct itself much better & faster than itself much better & faster than the gov’t couldthe gov’t could

Strengths & Weaknesses of Strengths & Weaknesses of Market EconomiesMarket Economies

StrengthsStrengthsInspires ingenuityInspires ingenuityHard workHard workProductivityProductivityEfficiencyEfficiency

WeaknessesWeaknessesOften leads to the exploitation of Often leads to the exploitation of

workers/poorworkers/poorUnemploymentUnemploymentFailed businessesFailed businessesSevere disparity between the rich & Severe disparity between the rich &

the poorthe poorEthical & Environmental ViolationsEthical & Environmental Violations

Market EconomiesMarket Economies

RememberRemember–The Free Market Answers The Free Market Answers the 3 Basic Economic the 3 Basic Economic QuestionsQuestions

Command EconomiesCommand Economies

Statistics to think About:Statistics to think About:Richest 1% own 33% of this Richest 1% own 33% of this

countrycountry’’s wealths wealth95-9895-98thth Percentile own 25% Percentile own 25%90-9490-94thth own 12.1% own 12.1%4949thth – 89 – 89thth own 27% own 27%Poorest 50% own 2.8%Poorest 50% own 2.8%

Karl MarxKarl Marx Disproportionate distribution of wealth Disproportionate distribution of wealth

inherent in a capitalist economyinherent in a capitalist economy

Working class (proletariat) violently revolting against the ruling class (bourgeoisie)

State takes over Factors of Production and redistributes them to the people – Classless equitable society

A Command Economy Values These A Command Economy Values These IdeasIdeas

EqualityEqualityCooperationCooperationCollectivizationCollectivization

Value: EqualityValue: EqualityEmphasized b/c of the Emphasized b/c of the problems with market problems with market economies: economies: –workers suffer workers suffer

–Wealth is distributed Wealth is distributed disproportionatelydisproportionately

Equality ContEquality Cont’’ddGoals:Goals:all members should have the SAME all members should have the SAME

opportunity to share in the wealth of a opportunity to share in the wealth of a country. country.

There needs to be a There needs to be a ““minimumminimum”” standard of living that standard of living that everyoneeveryone should enjoyshould enjoy

Value: CooperationValue: CooperationAll work toward a common All work toward a common goal goal

do what is in the best do what is in the best interest of the whole interest of the whole society (society (Social ChoiceSocial Choice), not ), not the individualthe individual

Value: CollectivizationValue: Collectivization

Collecting everyoneCollecting everyone’’s s talents together in a talents together in a cooperative effort can cooperative effort can accomplish moreaccomplish more

Characteristics of Command Characteristics of Command EconomiesEconomies

Public Ownership of PropertyPublic Ownership of Property

State/Government State/Government controls/owns the resources controls/owns the resources b/c they believe they can b/c they believe they can maximize the use of the maximize the use of the resourcesresources

Central PlanningCentral PlanningA group of economic A group of economic ““expertsexperts”” study study

the economy & recommend the economy & recommend production needs & targets to the production needs & targets to the governing body. governing body.

Production & supposedly Production & supposedly consumption are planned far into the consumption are planned far into the future.future.

StrengthsStrengthsLess disparity in distributed Less disparity in distributed

wealth (recall statistics)wealth (recall statistics)

•Higher levels of employment

•Minimum standard of living for all

Weaknesses: Shortages & SurplusesWeaknesses: Shortages & SurplusesIt is difficult for the central It is difficult for the central planning committee to set planning committee to set production targets that production targets that exactly fit the countryexactly fit the country’’s s needsneeds

Weaknesses: Slow Response to Weaknesses: Slow Response to Scarcity and Consumer NeedsScarcity and Consumer Needs

Production Targets are less Production Targets are less flexible to adapt to unforeseen flexible to adapt to unforeseen circumstances (product is circumstances (product is more popular than anticipated, more popular than anticipated, natural disasters, etc.)natural disasters, etc.)

Weaknesses: Lack of IncentiveWeaknesses: Lack of IncentivePeople have less incentive to People have less incentive to work hardwork hard be educated orbe educated or invent better productsinvent better products

Efficiency and thus, production suffers

Weaknesses: CorruptionWeaknesses: Corruption Central GovCentral Gov’’t & central planning t & central planning

committee have an enormous committee have an enormous amount of power and is susceptible amount of power and is susceptible to corruptionto corruption

•Shortages encourage items to be illegally imported and sold on the black-market

Command EconomiesCommand Economies

Remember:Remember:–““The State has command The State has command

over the 3 basic economic over the 3 basic economic questions.”questions.”