Economic Systems Seek to Answer What Key Economic Questions? Select All That Apply.

Lecture Outlines

2a - Market Economies and Trade

OUTLINE -- LESSON 2a
Making Choices and Market Economies

MAKING CHOICES - continued

BRIEF OUTLINE: The Necessity of Choice / Making Choices

• Private'due south Economizing Trouble: The Budget Line (Lesson 1c)
• Gild'due south Economizing Problem: Production Possibilities (Lesson 1d)
• How to Make Choices: Do good-Cost Analysis (Lesson 1d plus others)
• How Countries Make Economic Choices: Economic Systems (Lesson 2a)
• Capitalism and the Five Fundamental Questions (Lesson 2a)
• The Circular Menses Model of Capitalism (Lesson 2a)
• The Gains from Trade (Lesson 2a)

I. How Countries Brand Economic Choices: Pure Capitalism and the Market place System (The Market and the 5 Es)

A. Introduction

• Economical Systems
  • A particular prepare of institutional arrangements and a analogous machinery for solving the economizing problem;
  • A method of organizing an economy
• Ii principal types:
  • Command Economic system or socialism
  • Market place Economic system or Capitalism
  • Economic systems are ways that countries reply the 5 fundamental questions:

    1. What will be produced?
    2. How volition appurtenances and services exist produced?
    3. Who will become the output?
    4. How will the system suit change?
    5. How will the arrangement promote progress?

  • Economic Systems:
    • At that place are no PURE command economies
    • In that location are no PURE market economies
    • Instead there is a continuum of different characteristics

      

    • All over the world countries are changing their economies from command economies to market place economies
      • this procedure is called "Structural Aligning", or sometimes "Globalkization"
  • Economic Systems: Characteristics
    • who owns
    • who decides
      
  • Types of Economical Systems
    • Pure Capitalism
      • likewise called:
        • marketplace economy
        • competition
        • complimentary enterprise
        • laissez-faire commercialism
    • Command Economy
      • also called
        • socialism
        • land-run economy
        • centrally planned economy
        • communism
      • Examples:
        • North Korea
        • Cuba,
        • Turkmenistan
        • Myanmar
        • Belarus
        • Laos
        • Libya
        • Iran
        • Iraq (until 2003)
  

• All economic systems are Mixed Systems
  

Type OF System	WHO OWNS?	WHO DECIDES?
Pure Capitalism:	private ownership	the market system
Command Economy:	government buying	centralized (or gov't) determination-making
Mixed Economy	some private and some government	some individual and some government

• The Demise of the Control Systems / Structural Adjustment
  • The Coordination Problem
  • The Incentive Problem
    • http://www.npr.org/blogs/coin/2012/01/20/145360447/the-secret-document-that-transformed-people's republic of china
      • note the of import role of INCENTIVES

  • Paul Solman Video: Capitalism vs. Socialism - The Cuban Quandary (YouTube PBS NewsHour 13:56)
    https://www.youtube.com/watch?5=UmI00B2nKFs
    • note the important role of INCENTIVES

  • 

B. So, What is Capitalism? - Capitalist Ideology

• Basic Characteristics:

  Grade:	TEXTBOOK:
  1. private belongings 2. freedom of enterprise and choice 3. function of self involvement 4. competition 5. markets and prices vi. limited part for regime	1. individual holding 2. freedom of enterprise and choice 3. function of self involvement four. competition 5. markets and prices 6. technology and capital goods 7. specialization 8. use of money nine. agile, simply limited authorities

1. individual property

• provides an incentive for economical growth
• Paul Solman Video: Private Belongings (and Pilgrims too)
  [Ch2 http://highered.mcgraw-hill.com/sites/0077337735/student_view0/chapter2/_paul_solman_videos.htm ]

  OPTIONAL: http://world wide web.npr.org/templates/story/story.php?storyId=1565953

  China Considers Private Property Rights on National Public Radio

  All Things Considered, December 22, 2003 · In Beijing, legislators propose an amendment to the Chinese constitution guaranteeing private belongings rights. The motility has smashing symbolic importance in a country that is nominally communist, but whose people accept been buying holding and trading stocks for years as the result of economic reforms by Deng Xiaoping. NPR'south Rob Gifford reports.

2. markets and prices

• prices GUIDE resources
  • pickups driving to Florida with plywood
  • consumer sovereignty and dollar votes
• prices RATION appurtenances and services
  • high prices afterward a hurricane encourage people to conserve
• markets and prices affect allocative efficiency

  Quick Quiz:

  TO DECIDE HOW TO USE ITS Express Resource TO SATISFY Human WANTS PURE Capitalism RELIES ON:

  A. CENTRAL PLANNING
  B. FREE Trade
  C. A Toll System
  D. FULL EMPLOYMENT

3. function of self interest

• Introduction: would you rather take government or private concern . . . . ? WHY?
  • gas station near a desert
  • your east-postal service service
  • 24 hour gas stations
  • other

• Self interest is a powerful force and IF In that location IS COMPETITION IN AN Economy it will issue in improving the social proficient every bit if in that location is some "invisible paw" guiding their decisions.
  • "greed" and productive efficiency
  • "greed" and allocative efficiency
  • "greed" and economic growth

four. freedom of enterprise and choice

• definitions
  • Freedom of enterprise means that entrepreneurs and businesses take the freedom to obtain and employ resources, to produce products of their choice, and to sell these products in the markets of their choice.
  • Freedom of choice ways:
    • Owners of belongings and money resources tin apply their resources as they choose.
    • Workers tin cull the training, occupations, and job of their choice.
    • Consumers are free to spend their income in such a way as to best satisfy their wants (consumer sovereignty).
• provides the means for "greedy" people to assistance the economic system achieve allocative and productive efficiency, and economic growth

5. competition = commercialism

• what is competition?
  • i. Large numbers of sellers hateful that no single producer or seller can control the price or market place supply.

    2. Large number of buyers ways that no single consumer or employer can control the price or market need.

    3. Depending upon market conditions, producers can enter or leave manufacture easily.

• contest is the "invisible hand"
  • plywood after a hurricane
  • monopolies and inefficiency

6. express role for government

• What IS the economic part for government? (lessons 5a, 5b, more in macroeconmics)
  • teaching?
  • highways?
  • defense
  • health care?
  • restaurants?
  • making skis?
• Whenever the regime does something we should equally "WHY?"
  • Why should we ask "WHY?"
  • Why non let the government do everything?
  • Why non let private businesses do everything?
• Economic goals: 5 Es

• Bug with capitalism:
  • at times even market place economies achieve allocative INefficiency:
    • overproduction (too much produced) of goods with negative externalities (lesson 5a)
    • underproduction (also little produced) of goods with positive externalities (lesson 5b)
    • tendency for business concern to increase monopoly power and produce less to increase profits (lesson 10b)
  • macroeconomic instability (periods of high unemployment and periods of high inflation) (macroeconomics)
  • no mechanism to guarantee disinterestedness

C. The Marketplace System at Work

1. The Market and the 5Es

a. Economic Growth

(1) Define
(ii) Economical Growth and the characteristics of Capitalism

(a) private property
(s) self interest
(c) freedom of enterprise and choice

(3) market economies tend to take faster growth rates than do command economies

b. Allocative Efficiency: Producing what consumers want

(one) The role of self interest in capitalism provides INCENTIVES to be allocatively efficient.

• more profits = produce more (industry expands)
• losses = produce less (manufacture shrinks)
• Profits, and losses, are of import

(ii) Capitalism's use of the marketplace (supply and demand - lessons 3a, 3b, 3c) provides a Means to reach allocative efficiency

• consumer sovereignty and "dollar votes"

(3) Capitalism tends to achieves allocative efficiency (this is why we will study supply and demand in lessons 3a, 3b, 3c)

c. Productive Efficiency: Producing at a minimum cost

(1) The role of self interest (greed?) in capitalism provides INCENTIVES to be productively efficient.

(a) profits = total revenues - total cost
(b) minimizing costs means more profits
(c) minimizing costs is productive efficiency

(ii) Capitalism tends to achieve productive efficiency

d. Disinterestedness

• Capitalism does not have a mechanism to clinch EQUITY. This may be a role of government

e. Full Employment

• Economists disagree over whether capitalism volition guarantee Full EMPLOYMENT.
• studied in macroeconomics

two. Summary:

a. The move toward commercialism has resulted in high rates of ECONOMIC GROWTH in many countries. Profits, private belongings, and liberty of enterprise and choice promote growth

b. The price mechanism (supply and need) and the role of self interest provides for an ALLOCATIVELY EFFICIENT use of resource

c. Capitalism provides the incentives (turn a profit) for a PRODUCTIVELY EFFICIENT employ of resources

d. Capitalism does non have a machinery to clinch EQUITY. This may be a part of authorities

e. Economists disagree over whether capitalism will guarantee FULL EMPLOYMENT.

• Some say yes, and if there is unemployment it is usually caused by government interference
  
• Some say no, and at times government involvement is needed to move the economy towards total employment

---

Pure Capitalism and the Market System:
The Market place and the 5 Es

Characteristics of a Market Economic system (Capitalism)

A. individual belongings
B. markets and prices
C. office of self interest: incentives
D. liberty of enterprise and pick
East. competition

1. large numbers
2. complimentary entry and go out
3. produce standardized products

F. limited role for government

The Market and the 5Es

i. Economic Growth

Backer economies tend to take more than rapid rates of growth

two. Allocative Efficiency: Producing what consumers desire

a. Capitalism and incentives and means

(i) more profits = produce more

(2) losses = produce less

(3) consumer sovereignty and "dollar votes"

b. Capitalism tends to achieves allocative efficiency

three. Productive Efficiency: Producing at a minimum cost

a. Capitalism and incentives

(1) profits = full revenues - full toll

(ii) minimizing costs ways more profits

b. Capitalism tends to accomplish productive efficiency

4. Disinterestedness

In that location is no characteristic of commercialism which will guarantee disinterestedness

Oftentimes, the government gets involved to help achieve equity

five. Full Employment

Economists disagree over whether capitalism volition result in full employment

• Some say yep, and if at that place is unemployment it is usually caused by government interference
  
• Some say no, and at times authorities involvement is needed to move the economic system towards total employment

II. Capitalism and the Five Primal Questions

A. Introduction

1. The five fundamental questions must be answered past all economical systems.

ii. The 5 fundamental questions are:

a. What goods and services will to exist produced?
b. How volition the goods and services exist produced?
c. Who will get the output?
d. How will the organization accommodate change?
e. How will the system promote progress?

B. What volition exist produced? (Allocative Efficiency)

1. In order to be profitable, businesses must respond to consumers' (individuals, other businesses, and the government) wants and desires.

two. Consumer Sovereignty and "dollar votes"

C. How will the goods and services be produced? (Productive Efficiency)

1. The market system encourages and rewards those producers who are achieving least-cost production.

2. The nigh productively efficient technique will be the one that produces a given corporeality of output with the smallest input of limited resources.

D. Who will become the output? (Equity)

1. determined by how the income is distributed

ii. Products go to those who are willing and able to pay for them.

iii. The productivity of the resources, the relative supply of detail resources, and the ownership of the resources will make up one's mind the income of individuals and households.

4. The resulting distribution of income may not exist the most equitable (fair).

E. How will the system accommodate change?

1. Markets are dynamic - what is efficient today may not be efficient tomorrow as tastes, technology, and resource supplies change.

ii. Prices help signal those changes and the market volition respond. This guiding function of prices is essential to a well-functioning market system.

3. In the absenteeism of such signals, authorities or some similar institution would accept to decide where resources are allocated, but without knowing what people in society desire. the result would virtually likely be allocatively inefficient.

F. How will the system promote progress?

i. The market system promotes technological improvements and capital aggregating (economic growth).

ii. An entrepreneur or firm that introduces a popular new product volition be rewarded with increased revenue and profits. (allocative efficiency)

3. New technologies that reduce product costs, and thus product price, will spread throughout the industry as a outcome of contest. (economical growth)

iv. Artistic destruction occurs when new products and production methods destroy the marketplace positions of firms that are not able or willing to adjust. NOTE: this is good for guild.

III. The Round Flow Model of Capitalism

The Round Menstruation Model

The menstruum of resources from households to firms and of products from firms to households. These flows are accompanied by reverse flows of coin from firms to households and from households to firms.

A. 2 Markets

1. production market

A market place in which products are sold by firms and bought by households.

a. how much to buy
b. how much to produce

2. resources market

A marketplace in which households sell and firms purchase resource or the services of resources.

a. how many to hire
b. how much we earn

B. Two Flows

i. existent flow
2. coin period

C. Reversal of Roles
D. Limitations

E. Diagram

IV. Why We Trade: Comparative Advantage

A. INTRODUCTION

Major economical changes have been occurring in the last few decades. Countries all around the earth, including the United States are currently engaged in a procedure of globalization, or structural adjustment. This includes, among other things, moving toward free trade. Globalization and the removal of trade barriers is occurring at present and it volition go on to occur. In the previous lecture it was mentioned that much of what we hear in the popular press is contrary to what we are going to acquire in this grade. This is very truthful when discussing globalization. For instance, read the post-obit quotes from the CNN news article: Dobbs: New Congress must show courage [http://www.cnn.com/2006/United states/11/28/Dobbs.Nov29/index.html].

Lou Dobbs, CNN News commentator and best-selling writer, says:
Dobbs: New Congress must evidence courage [http://world wide web.cnn.com/2006/US/11/28/Dobbs.Nov29/index.html]

• "But the consequences of faith-based free-trade volition be center-popping in the disaster it wreaks on our economy and working Americans."
• "I hope they (the new Autonomous congressional leadership) tin admit that so-called free trade has come up at an inordinate cost to working men and women in this country. "
• "Nosotros've lost three million manufacturing jobs equally a result of these and then-chosen gratuitous trade agreements that enable corporate America to export plants, production and jobs to inexpensive foreign labor markets."
• "And notwithstanding we persist with our historical ignorance, and we continue to enter poorly negotiated agreements that pose dandy threats to the U.S. economy and the center grade."

From the Trump campaign website: https://www.donaldjtrump.com/policies/trade

• America has lost nearly one-3rd of its manufacturing jobs since NAFTA and 50,000 factories since Red china joined the Earth Trade Organization. [Economic Policy Institute, Apr 23, 2015]
• The U.S. trade deficit with the proposed TPP member countries cost over 2 one thousand thousand jobs in 2015. By far the biggest losses occurred in motor vehicles and parts, which lost nearly 740,000 manufacturing jobs. Imagine how many more jobs would be lost if the Trans-Pacific Partnership was actually approved. [Economic Policy Establish, March 3, 2016]
• The Trans-Pacific Partnership will undermine our economic system, and it will undermine our independence:

Then read the post-obit quotes taken from our textbook (19th edition):

• p. 96 "Nations specialize and trade for the same reasons equally individuals: specialization and exchange results in a greater overall output and income."
• p. 98 "Specialization (i.e. trade) improves global resource allocation. The same total inputs of world resources and engineering result in a larger global output."
• p. 405 "Import restrictions alter the composition of employment, but they accept lilliputian or no result on the volume of employment."
• p. 101 - "Actually the true benefit created by international trade is the overall increase in output obtained through specialization and commutation.
• p. 403- "the gains that US trade barriers create for protected industries come at the expense of much greater losses for the unabridged economy. (accent added). The result is economical inefficiency, reduced consumption, and lower standards of living."
• p. 403 - Study later on written report finds that the costs to consumers (of trade restrictions) substantially exceed the gains to producers and government."

"Specialization according to comparative advantage results in a more than efficient allotment of the world's resources, and larger outputs ...." (McConnell and Brue 2005, p. 361)

Two. REVIEW: Why report International Trade (Specialization, Exchange, and Efficiency)?

A. Productive Efficiency: using resources where best suited ( 5Es )

B. Production Possibilities vs CONSUMPTION Possibilities ( graph )

Iii. Introduction to Trade

A. Should We Have Free Trade With Other Countries?
B. Why AND Why Non?

• Spend a few minutes writing downwards your ideas.
• Country your opinion and defend it
• as well, land arguments that oppose your opinion

C. Many people utilize anecdotal evidence to oppose freer trade
D. but most economists favor freer trade

Iv. The Economic Basis for Specialization and Exchange -- Trade

A. Pre-quiz (xanthous page)- Do you think like an economist?
B. Why we specialize and exchange?

1. What would life exist similar if YOU were cocky-sufficient?

ii. Trade: advantages and disadvantages

a. advantage:

• larger total output / higher living standards
• lower prices

b. disadvantage:

• less independence / more interdependence

3. The basis for specialization and commutation

a. differences in resource endowments
b. differences in preferences
c. differences in productivity (MORE BELOW)

one) ascertain productivity
two) define absolute advantage
3) a good lawyer trades with a good mechanic

d. differences in opportunity costs (More Below)

1) define opportunity cost
2) define comparative advantage
three) The lawyer/mechanic argument revised

C. Differences in Productivity: Absolute Reward

ane. production possibilities: self sufficiency
2. specialization
3. trading possibilities: more full output

D. Differences in Opportunity Costs: Comparative Advantage

one. production possibilities: self sufficiency
2. specialization

a. comparative advantage
b. calculating opportunity costs

3. trading possibilities: more total output

"Specialization according to comparative advantage results in a more efficient allotment of the world'southward resources, and larger outputs ...." (McConnell and Brue 2005, p. 361)

4. trade with increasing costs

a. review: law of increasing costs
b. result: specialization is less than 100%

five. terms of merchandise

a. definition
b. minimum and maximum terms of trade
c. actual terms of trade

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Source: http://www2.harpercollege.edu/mhealy/eco211/lectures/choices/choices.htm

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