2.1 Economic Questions

Transcription

1 2.1 Economic Questions Objectives and Economic Systems Objectives Identify the three questions that all economic systems must answer. Describe a pure market economy, and identify its problems. Describe a pure command economy, and identify its problems. Compare mixed, transitional, and traditional economies.

2 2.1 Economic Questions and Economic Systems Key Terms economic system pure market economy pure command economy mixed economy market economy transitional economy traditional economy

3 2.1 Economic Questions and Economic Systems SLIDE 3 The Three Economic Questions All economies must answer three questions: 1. What goods and services will be produced? 2. How will they be produced? 3. For whom will they be produced?

4 2.1 Economic Questions and Economic Systems SLIDE 4 Economic System An economic system is the set of mechanisms and institutions that resolves the what, how, and for whom questions. Some standards used to distinguish among economic systems are: Who owns the resources? What decision-making process is used to allocate resources and products? What types of incentives guide economic decision makers?

5 2.1 Economic Questions and Economic Systems SLIDE 5 Pure Market Economy All resources are privately owned. Coordination of economic activity is based on the prices generated in free, competitive markets. Any income derived from selling resources goes exclusively to each resource owner.

6 2.1 Economic Questions and Economic Systems SLIDE 6 Invisible Hand of Markets According to Adam Smith ( ), market forces coordinate production as if by an invisible hand.

7 2.1 Economic Questions and Economic Systems SLIDE 7 Problems with Pure Market Economies Difficulty enforcing property rights Some people have few resources to sell Some firms try to monopolize markets No public goods Externalities

8 2.1 Economic Questions and Economic Systems SLIDE 8 Pure Command Economy All resources government-owned Production coordinated by the central plans of government officials Sometimes called communism

9 2.1 Economic Questions and Economic Systems SLIDE 9 The Visible Hand of Central Planners Central planners direct the allocation of resources and products Control resources Direct production Allocate products

10 2.1 Economic Questions and Economic Systems SLIDE 10 Problems with Command Economies Consumers get low priority Little freedom of choice Central planning can be inefficient Resources owned by the central authority are sometimes wasted Environmental damage

11 2.1 Economic Questions and Economic Systems SLIDE 11 Mixed Economy United States is a mixed economy. Because markets play a relatively large role, it is considered a market economy. Government regulates the private sector in a variety of ways.

12 2.1 Economic Questions and Economic Systems SLIDE 12 Transitional Economy A transitional economy is in the process of shifting orientation from a command economy to a market economy. This transition involves converting government enterprises into private enterprises privatization. The transition now under way will shape economies for decades to come.

13 2.1 Economic Questions and Economic Systems SLIDE 13 Traditional Economy A traditional economy is shaped largely by custom or religion. Family relations also play significant roles in economic activity.

14 2.2 Production Possibilities Frontier Objectives Describe the production possibilities frontier, and explain its shape. Explain what causes the production possibilities frontier to shift.

15 2.2 Production Possibilities Frontier Key Terms production possibilities frontier (PPF) efficiency law of increasing opportunity cost economic growth

16 2.2 Production Possibilities Frontier SLIDE 3 Efficiency and Production Possibilities Frontier Simplifying assumptions PPF model Inefficient and unattainable production Shape of the PPF

17 2.2 Production Possibilities Frontier SLIDE 4 Production Possibilities Frontier A through F are attainable I represents inefficient use of resources U represents unattainable combinations Figure 2.1

18 2.2 Production Possibilities Frontier SLIDE 5 Shifts in the PPF Changes in resource availability Increases in stock of capital goods Technological change Lessons from the PPF

19 2.2 Production Possibilities Frontier SLIDE 6 Shifts in the PPF Increase in Available Resources Decrease in Available Resources Figure 2.2

20 2.3 Comparative Advantage Objectives Explain the law of comparative advantage. Understand the gains from specialization and exchange.

21 2.3 Comparative Advantage Key Terms absolute advantage law of comparative advantage specialization barter money division of labor

22 2.3 Comparative Advantage SLIDE 3 Comparative Advantage Absolute advantage to be able to make something using fewer resources than other producers require Law of comparative advantage the worker, firm, region, or country with the lowest opportunity cost of producing an output should specialize in that output Specialization occurs when individual workers focus on single tasks, enabling each one to be more efficient and productive

23 2.3 Comparative Advantage SLIDE 4 Gains from Specialization Absolute advantage focuses on which of you uses the fewest resources, but comparative advantage focuses on what else those resources could have produced that is, on the opportunity cost of those resources. The law of comparative advantage indicates who should do what.

24 2.3 Comparative Advantage SLIDE 5 Exchange Barter a system of exchange in which products are traded directly for other products Money anything that everyone is willing to accept in exchange for goods and services

25 2.3 Comparative Advantage SLIDE 6 Wider Application Resources are allocated most efficiently across the country and around the world when production and trade conform to the law of comparative advantage.

26 2.3 Comparative Advantage SLIDE 7 Specialization Because of specialization based on comparative advantage, most people consume little of what they produce and produce little of what they consume. Division of labor sorts the production process into separate tasks to be carried out by separate workers.

27 2.3 Comparative Advantage SLIDE 8 Division of Labor Takes advantage of individual preferences and natural abilities Allows workers to develop more experience at a particular task Reduces the time required to shift between different tasks Permits the introduction of labor-saving machinery

28 2.3 Comparative Advantage SLIDE 9 Specialization that Results with Division of Labor Does not occur among individuals only Also occurs among firms, regions, and entire countries