PowerPoint PresentationSlide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 42Slide 43Slide 44Slide 45Slide 46How Decisions are MadeUsing an Economic SystemMethod of organizing the relationship between businesses, households and the government to make the production decisions4 Types1. Agrarian or Traditional- Follow in family business-Usually smaller groups-Few true examplesA. What?What the family business has been producing (for generations)1. Agrarian or TraditionalB. How?Using the same method that have been used (for generations)No incentive for change1. Agrarian or TraditionalC. For Whom?Determined by place in society.1. Agrarian or TraditionalStrengths-Economic security-Strong family/community ties1. Agrarian or TraditionalWeaknesses-Resistant to change-Few economic incentives/freedom-Limited goods and services available-Keeps social order2. Market Economies- Based on price system-Interaction of buyers and sellers-Involves private property rightsA. What?- Goods and services that are profitable- Goods and services consumers want.B. How?Efficiently- least cost combination of resources2. Market EconomiesC. For Whom?Those who can pay.2. Market EconomiesStrengths-Efficient production-Prices coordinate production-Provides a wide variety of goods-Able to adjust for changing demand2. Market EconomiesWeaknesses-Not always socially desirable goods-No economic security-Imperfect knowledge about goods that are available2. Market Economies3. Planned Economies-Government owns resources-Government make production decisionsA. What?-Goods needed to meet economic planning targetsB. How?Aimed at achieving targets Switch resources around to meet targets3. Planned EconomiesC. For Whom?Government decides who gets goodsBonuses for important workers3. Planned EconomiesStrengths-Can achieve social goals-Can eliminate unemployed resources-More equitable distribution of goods-More easily able to adjust resources3. Planned EconomiesWeaknesses-Over or underproduction-Few incentives for workers-Few choices for consumers-Increasingly complex process3. Planned Economies4. Mixed Economies-Combine aspects of market and planned economies-Includes almost all economies4. Mixed EconomiesCoordinating MechanismResource OwnershipMarket System PlanningPrivatePublicUSCubaChinaNazi Germany1. Businesses are free to produce what ever they want and are always looking for cost-cutting techniques of production.Traditional?Mixed?Planned?Market?MarketMarketMarket2. A catering business goes bankrupt, but its employees receive unemployment compensation while they look for other jobs.Traditional?Mixed?Planned?Market?MixedMixedMixed3. Union and management representatives submit a deadlocked labor contract negotiation to the government for mediation.Traditional?Mixed?Planned?Market?MixedMixedMixed4. Workers who have lost their jobs and incomes cut back their spending because there is no alternative source of emergency financial support once their savings runs out.Traditional?Mixed?Planned?Market?MarketMarketMarket5. Consumers are unable to obtain fuel injectors and windshield wiper motors for their cars because they are not being produced, yet accordions, which are plentiful and not in demand, continue to be produced.Traditional?Mixed?Planned?Market?PlannedPlannedPlannedHouseholdsBusinessesProduct MarketsFactor MarketsWhich one?a. A real flow through a product market?b. A money flow through a product market?c. A real flow through a resource market?d. A money flow through a resource market?1. Receiving a paycheck at the end of each month?2. Delivering a specially ordered car to a buyer?3. Receiving patient care in a hospital?4. Using a credit card to buy a meal in a restaurant?5. Earning profit at your summer ice cream stand?6. Obtaining college credits?7. Working overtime?ab cdHouseholdsBusinessesProduct MarketsFactor MarketsResourcesPayments $$Goods and ServicesBusiness TaxesGoods and ServicesIncome TaxesPayments and LegalResourcesPaymentsGoods and Services• Four key markets coordinate the circular flow of income. •1. the resource market coordinates demand for factors of production between businesses and households.3. The loanable funds marketdirects household and foreign investments to business and government borrowers .4. The foreign exchange market coordinates demand for currencies for export/import transactions2. The goods & services market coordinates the demand for output between businesses and households.The Circular Flow DiagramAnotherCircularFlowGovernment Involvement in the Circular FlowWith Households:It Provides:Legal Framework Infrastructure SecurityIt Gets:TaxesGovernment Involvement in the Circular FlowWith Businesses:It Provides:Legal Framework Infrastructure SecurityIt Gets:TaxesGovernment Involvement in the Circular FlowWith Factor Markets:It Provides:Legal Framework Infrastructure Security Factor PaymentsIt Gets:Factors of ProductionGovernment Involvement in the Circular FlowWith Product Markets:It Provides:Legal Framework Infrastructure Revenue PaymentsIt Gets:Goods and ServicesMarket prices direct individuals pursuing their own interests to produce good that will benefit society1. Adam Smith’s The Wealth of Nations(new theory) The best way to increase the wealth of a country is through individual decision making with minimal government influence. Laissez faire(old theory) Mercantilism – government formed economic policy. -It granted charters for colonies to produce certain goods(new)2. Industrial Revolutiona. Inventions made large-scale production possible.+ mass production, factory system- long hours, poor working conditionsb. Creates a need for inputs and a need for markets3. US Developmenta. Growth in transportation and communications opened new marketsb. Electricity and oil allowed for mass productionc. New goods were invented-typewriters, light bulbs, automobile, new farm machineryd. Problems developed1. Large businesses became monopolies and trusts2. Living conditions became harsh - long hours, low wages, slums, child labor3. Government Responsea. Anti-trust legislation - FTC, Food and Drug Act, Sherman Anti-Trust Actb. Movement away from laissez