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Economics Unit 2

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by

Eric Ling

on 12 February 2015

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Transcript of Economics Unit 2

Economics Unit 2
The Market System & The Circular Flow
Economic Systems
Defined by.....
a. Who owns production
b. The method used to motivate, coordinate, and direct Economic activity.
Centralized Economic Decisions
COMMAND
ECONOMY
Centralized production ownership
Centralized decision making
Prices?
Distribution of Wealth?
Employed Resources?
Innovation?
Wages?

Competition? Absent

Pure Command?
The Basics
MARKET
ECONOMY
* Private ownership of Resources
*Free market is preserved
* Individuals seek to reach their own goals through decisions
C1: Private Property
C3: Freedom of Choice
C4: Self-Interest
C2: Freedom of Enterprise
All Property and Resources are owned
by Centralized Entity (Gov)
Production Decisions?
Based on long-term goals of central entity
Where does Command
Economy fall short?
PRIVATE OWNERSHIP



MONETARY INCENTIVES MOTIVATE



PRICES COMMUNICATE



INDIVIDUALS DECIDE: PURCHASE? PRODUCTION?






Gov Role?


Preserve Private Property
Maintain Market Environment
FREEDOM TO NEGOTIATE LEGALLY BINDING AGREEMENTS



OBTAIN AND DISPOSE OF PROPERTY AT WILL



MUTUALLY AGREEABLE TRANSACTIONS



ENCOURAGES INNOVATION, MAINTENANCE, GROWTH....."It belongs to me"



INTELLECTUAL PROPERTY? PRESERVED!
PRIVATE PROPERTY
FACILITATES EXCHANGE

HOW?
FOE: Ensures Entrepreneurs & Companies
a. Produce what they want
b. Obtain resources they desire
FOC: ENSURE THAT INDIVIDUALS:
A) EMPLOY OR DISPOSE OF PROPERTY AS THEY DESIRE
B) GO INTO OCCUPATION OF THEIR CHOICE
C) PURCHASE WHAT THEY DESIRE
SELF-INTEREST MOTIVATES THE ACTIONS OF INDIVIDUALS, COMPANIES
& ORGANIZATIONS BASED ON THEIR PRIORITIES = ORGANIZED/PREDICTABLE
ENTREPRENEUR?

PROPERTY OWNERS?

CONSUMERS?

WORKERS?


MAXIMUM PROFITS

MAXIMUM UTILITY
COMPETITION
DIFFUSES
POWER
PEOPLE ENTER
& LEAVE MARKET
AT WILL
STAY FLEXIBLE
& EFFICIENT
TO MEET
NEEDS/DESIRES
THIS REGULATES THE MARKET AND ENSURES
NO ONE GETS TOO MUCH POWER
HIGHER PRICE? FEWER SALES


NATURALLY EXPANDS
& CONTRACTS
MARKET PRICES
= COMMUNICATION
MARKET ECONOMY IS
HIGHLY COORDINATED
MARKETS COLLECT EVIDENCE OF ALL OF THE DECISIONS OF
BUYERS AND SELLERS
CHOICES IN MARKET?
SELLERS: WHAT AND HOW MUCH TO SUPPLY


BUYERS: WHAT AND HOW MUCH THEY DEMAND
THIS RELATIONSHIP? SET'S PRICES
MARKET RECORDS, SUMMARIZES,
& BALANCES ALL DECISIONS NATURALLY
PAY ATTENTION? REWARDED

IGNORE? PENALIZED

*HIGHLY MOTIVATED TO PAY ATTENTION
Technology & Capital Goods
Market Economy
The Details

Tech, Specialization, Money, and Gvt. Role
SPECIALIZATION IN M.E.

Why Money?
What motivates Technological Advancement?

Why Important?

INCREASED EFFICIENCY
Freedom of Choice

Competition

Self-Interest

PERSONAL REWARD

Who gets monetary rewards?
INNOVATOR!
ENCOURAGES ENCOURAGES EXTENSIVE USE & RAPID DEVELOPMENT OF CAPITAL GOODS
LIKE...tools, machines, large-scale factories, storage, communication, marketing
Resources of individual, firm, region or nation to produce one or a few goods.
Do you consume what you produce?

HARDLY!
Specialization increases output
= EFFICIENCY
DIVISION OF LABOR
1. It takes advantage of differing abilities
2. It develops more skilled labor
3. It saves time
Geographic Specialization
What does your location enable you to produce @ lowest cost?
What are your resources best suited to produce?
Barter makes it difficult and has no standard
Currency is the "medium of exchange" that EASES trade




No "coincidence of wants"? With $$ that is NO PROBLEM!
What will be produced?
Five
Questions
How do Market Economies respond to each of these questions?
HOW WILL THE SYSTEM ACCOMMODATE CHANGE?
HOW WILL SYSTEM PROMOTE PROGRESS?
HOW WILL GOODS AND SERVICES BE PRODUCED?
WHO WILL GET THE OUTPUT?
TECHNOLOGY:




CAPITAL ACCUMULATION:


TR
>
TC
TR
<
TC
P
P
DOLLAR VOTES
LEAST COST PRODUCTION?
TECHNIQUE USED?

MOST EFFICIENT/LEAST COSTLY
WILLING & ABLE
WILLING = DESIRE



ABLE = INCOME
PRODUCTION CHANGES IN RESPONSE TO PRICE




HIGHER PRICE? HIGHER PROFIT = HIGHER INVESTMENT




TRANSFER OF RESOURCES TO EXPANDING INDUSTRY
CREATIVE DESTRUCTION
or
example:

The "Invisible Hand"
Economic Model
Problems & Circular
Flow Chart

Pure Command Economy Issues

Circular Flow Diagram
Self-Interest?
=============>
PUBLIC GOOD!
as though guided by invisible hand
Coordination Problems




Incentive Problems
Day(s) without Specialization
Econ in the NEWS!
How do we stop crime....with economics?
Full transcript