Thursday, March 19• Welcome back! • Bellringer: Create a

production possibility curve with the information in the chart.

• Bellringers due tomorrow!

• Join Celly! Text @AHSFosterEcon to 23559.

Trucks (1000s/

year)

Boats (1000s/

year)

0 10

A 4 9

B 7 7

C 9 4

10 0

Production possibility curves

• Any point on the curve is efficient, because more of one good can be made by sacrificing another

• Any point within the curve is possible, but inefficient, because all resources aren’t being used

• Any point outside the curve is impossible, because you don’t have enough resources to make it happen

Four types of economic systems

• Traditional economy• Market economy• Centrally planned economy• Mixed economy• The nature of each depends on who is

answering the three main questions: WHAT is being produced, HOW is it being produced, and WHO is getting what is produced?

Centrally planned economy

• Economic system in which the central government makes all decisions on the production and consumption of goods and services– Direct contrast to free market systems– Oppose private property– Oppose free market pricing– Oppose competition– Oppose consumer choice

Centrally planned economy

• On the three key economic questions:– Central government answers determines

what, how and for whom goods and services are produced and consumed

• Bureaucrats communicate information to firms• Bureaucrats monitor raw materials and

production to ensure that quotas are met– Central government owns factors of

production

Socialism vs. communism

• Socialism: A social and political philosophy based on the belief that democratic means should be used to evenly distribute wealth throughout a society

• Communism: a political system characterized by a centrally planned economy with all economic and political power resting in the hands of the central government

Karl Marx

• German philosopher, journalist, economist

• Co-authored The Communist Manifesto, 1848

• Society is a class struggle between the bourgeoisie, the wealthy middle class, and the proletariat, the industrial working class

Karl Marx

• Believed government planners had expertise afforded by their education, and they should direct resource allocation, production, and consumption

Socialism vs. communism

Case study: Soviet Union

• Soviet Union created out of revolutions in 1917

• Vladimir Lenin led the Bolsheviks, who renamed themselves communists

• Communist Party controlled central planning from 1920s until 1991

Case study: Soviet Union

• Soviet planners prioritized– Armed forces– Space program– Capital goods production (farm equipment,

tractors)• What economic goals did Soviet planners

choose to prioritize?• What economic goals did Soviet planners

choose to put on the back burner?

Case study: Soviet Union

• Central government created huge state-owned farms and collectives– Collective: large farm leased from the state to

groups of peasant farmers

Pros Cons

Case study: Soviet Union

• Central government also owned factories• Planners prioritized the defense industry,

space program, and heavy industry– Heavy industry: industry that requires a large

capital investment and that produces items used in other countries

• What did this mean for people who produced consumer goods and services?

Case study: Soviet Union

• Central government set wages• Quotas destroyed incentives to produce more,

better• Entrepreneurship was actually illegal• What did this mean for consumers?

• Individual freedom is sacrificed for societal goals

Centrally planned economy

• Pros– Can be used to jumpstart selected

industries – Jobs are guaranteed– Income is guaranteed

Centrally planned economy

• Cons– Poor quality of goods and services– Non-priority goods and services develop

shortages– Lacking incentives, production declines– Bulky bureaucracy making decisions is

inflexible, making adjustments difficult– Decisions are overly complicated

Case study: Soviet Union

• The Soviet Union’s centrally planned economy was successful in developing heavy industry

• But it was a disaster for agriculture– Resources were allocated inefficiently– Serious food shortages developed– Millions of people starved to death

Economies in transition

• Adam Smith believed the free market system would provide the greatest benefit to consumers and raise the standard of living– Self-interest– Voluntary exchange, where both parties benefit– Invisible hand of the market

• Laissez faire: The doctrine that states that government generally should not intervene in the marketplace

Economies in transition

• But free markets aren’t perfect– They can’t always meet every societal needThink national security, interstate

highways, or flood-management projects– They can foster dangerous risksThink unregulated meat-packing plants

Economies in transition

• Similarly, centrally planned economies are fatally flawed– They limit economic freedom– They limit economic growth– They cannot adequately provide for

consumers’ needs

Economies in transition

• Most modern economies are mixed economies, which blend characteristics of each system

• Centrally planned economies are privatizing state firms– Privatize: to sell state-run firms to

individuals; a component of transitioning from a centrally planned economy to a market-based economy

Mixed economy

• Market-based economic system with limited government involvement

• What is government’s role in a market-based economic system?– Protect private property: property owned by

individuals or companies, not by the government or the people as a whole

– Enforce contracts– Protect competition

Mixed economy

• Adding government to your circular flow model

• Government in the factor market– Government buys land, labor, and capital

Mixed economy

• Government in the product market– Government buys goods and servicesOffice supplies, buildings, etc. – Government produces goods and servicesGovernment builds roads, schools, etc.

Mixed economy

• Transferring money– Government collects taxesIncome! Gas! Groceries! Cars! Water! Cable!

Phone! Property!– Government provides subsidies, disability

payments, etc. Social Security, Medicare, Medicaid,

disability, unemployment, farm payments, etc.

Comparing mixed economies

Mixed economy

• If government is going to be involved, how much should it be involved?

John Maynard Keynes

• British economist• Present for negotiations after

World War I• He pressed for Germany’s war debts to be written

down, believing that was better for the global economy as a whole

• But retribution – revenge – won the day• Keynes warned of terrible consequences of a

decision he saw as reckless and irresponsible

John Maynard Keynes

I cannot leave this subject as though its just treatment wholly depended either on our own pledges or on economic facts. The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable, – abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe.

The Economic Consequences of the Peace, 1919

John Maynard Keynes

• Keynes condemned those who insisted that Germany “year by year … must be kept impoverished and her children starved and crippled”

• In effect, he was warning against those conditions creating the environment for a second world war

John Maynard Keynes

If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing.

The Economic Consequences of the Peace, 1919

John Maynard Keynes• Free market advocate … • … Until the Great Depression• Published The General Theory of Employment,

Interest, and Money in 1936• Believed that government has a role in times of

economic trouble to help get things going again• But when things got going again, the

government should back off and let the market do its thing

Comparing mixed economies

• You can evaluate economic systems relative to each other using a continuum– Continuum: a range with no clear divisions

Centrally planned

Free market

Comparing mixed economies

• The continuum shows how much free enterprise exists in each country, relative to the others– Free enterprise: an economic system

characterized by private or corporate ownership of capital goods, investments that are determined by private decision rather than by state control, and determined in a free market

Comparing mixed economies

• Government plays different roles in different nations

• Its level of involvement in the economy determines its position on the continuum

Comparing mixed economies

• Which nation(s) has the least government involvement in the economy?

• What would you expect trade there to be like?

Comparing mixed economies

• Which nation(s) have the most government involvement in the economy?

• What would you expect trade there to be like?

Comparing mixed economies

• What conclusions can you draw about the United States economy from observing its location on the continuum?

Test tomorrow!

• As part of your preparation for your test tomorrow, complete the chart comparing the four types of economic systems.

• Submitting a completed, correct comparison chart will earn you 10 percent extra credit on your test tomorrow.

• Review your notes!• Celly or email me with questions! • Good luck!