Tom Christesen
Graphic OrganizerBig Idea CardBig Ideas of Lesson 2, Unit 6 All societies have to answer the three main economic questions: What to produce? How to produce? Who should get what is produced?Different types of economic systems result when different groups of people have the power and authority to answer the three main economic questions. In a command system, the economic questions are answered by the government.In a market system, the economic questions are answered by the interaction of buyers and sellers.Most countries today have a mixed economic system which means part of the economy is driven by the interactions of buyers and sellers and part of it is controlled by the government.Not all mixed economic systems are the same; they differ in the amount of power and authority the government has over the economy.Word Cards234124500011command economy an economic system in which the three main economic questions are answered by the governmentExample: In a command economy, prices are set by the government. (SS060602)12 market economy 2472690-58420000an economic system in which the three main economic questions are answered by the interaction of buyers and sellersExample: In a market economy, prices are set when sellers and buyers agree on the price for a good or service. (SS060602)13 circular flowthe pattern in which goods and services 2118360-97853500and resources flowin the marketplaceExample: In the circular flow model, you can see how money travels from people to businesses and back to people again.(SS060602)190436500014 mixed economy 24771355270500 a combination of command and market economiesExample: Most countries in the world today have mixed economies. (SS060602)15monopoly1677670-52133500a situation in which one company controls an industry or is the only provider of a product or serviceExample: The company had a monopoly on tires so it could set the prices high and did not have to worry about competition. (SS060602)2465070-38100016regulationa government rule with the force of law that states what may or may not be done or how something must be doneExample: Many government regulations are aimed at protecting the health and safety of consumers.(SS060602) COMMAND AND MARKET ECONOMIESProducts such as bread, meat, clothing, refrigerators, and houses are produced and sold in virtually every country of the world today. The production methods and resources used to make these products are often very similar in different countries. For example, bread is made by bakers using flour and water, often with salt, sugar, and yeast added, then baked in ovens. Once the bread has been baked, the loaves are sold to consumers in stores that, at least superficially, can look very much alike, even in countries with very different kinds of economic mand Economies and ClothingDespite those apparent similarities, there are many differences. Let’s compare the market economies of North America, Western Europe, and Japan to the command economies found in the former Soviet Union, Eastern Europe, and parts of Asia over the past half century. The processes used to determine what products to make, how to make them, what prices to charge for them, and who will consume them are starkly different. To see those differences more clearly, let’s look at how production and sales decisions are made in the two kinds of systems for a specific kind of products -- shirts and blouses.In command economies, government committees of economic planners, production experts, and political officials establish production levels for these goods and designate which factories will produce them. These central planning committees also establish the prices for the shirts and blouses, as well as the wages for the workers who make them. It is this set of central decisions that determines the quantity, variety, and prices of clothing and other products.Three problems often occur within this system: poor planning decisions, the inability to respond efficiently to change, and limited choices for consumers. Since production and distribution decisions are made centrally, there tends to be more surpluses and shortages. A shortage is when the products sell out quickly, disappearing from store shelves. Products sell out quickly when factories fail to meet their production quotas or the central planning group underestimates how many shirts people want to buy at the prices they set. In either case, unless the planners take steps to increase production, raise prices, or both, the shortages will continue. Surpluses occur when the central planning group underestimates how many shirts people want to buy at the prices they set. Moreover, it is difficult for central planners to respond efficiently to changes in the economy because decisions are made centrally. Such decision-making requires large amounts of information. Gathering and responding to that information takes time, which makes it difficult to respond to changing economic conditions efficiently. Finally, the choices of products tend to be limited. When central planners make the decisions on the varieties of the product they produce and what workers get paid, there is no incentive for individuals and businesses to be innovative, which limits choices. As the number of people living in the command economies increases, along with the number and sophistication of new products, it becomes harder and harder for central planners to avoid or eliminate shortages of the many things consumers want -- or surpluses of the products they don't. With more products, more people, and rapidly changing production technologies, the central planners face an explosion in the number of decisions they have to make, and in the number of places and ways where something could go wrong in their overall plan for the national economy.Market Economies and ClothingBig shortages and big surpluses do not happen in the market economies because economic decision making is different. To begin with, no central government planning group decides how many shirts or blouses to manufacture, or what styles and colors. Decisions in a market economy are made through the interactions of buyers and sellers. Anyone -- individual or company -- can decide to produce and sell shirts and blouses in a market economy. Many will do just that if they believe they can sell these products at prices high enough to cover their costs -- and earn more money than they can doing something else. This leads to direct competition between different firms making and selling shirts and blouses. Competition is one of the basic reasons why there are generally so many different styles, fabrics, and brands of clothing for consumers to choose from in market economies.Of course, if consumers decide to buy just one kind of shirt and blouse month after month and year after year, producers would soon learn that there was no reason to produce any other kind. But that simply hasn't happened where people are allowed to choose from a wide selection of clothing products.Another key point about market economies is that the prices for shirts, blouses, and other products sold in stores aren't set by a central government planning committee. Instead, every seller is free to raise or lower prices according to changing market conditions. For example, if one kind of shirt becomes very popular for a time, and stores are worried about running out until they can get more, the store may raise price of such shirts, at least until new shipments arrive. This price increase accomplishes two things at the same time. First, by making this kind of shirt more expensive compared to other shirts and products, some consumers will choose to buy fewer of them and more of other items. Second, sellers are affected. The higher price goes directly to those who produce and sell the shirts -- not the government. So, the higher price results in an increase in the profits of firms that makes and sells this shirt. The increase in profits enables those firms to produce and sell more of those shirts. Firms that make other products also see those higher profits going to the shirt producers, which lead some firms to stop making something else and start making those popular shirts.For all of these reasons -- consumers buying fewer shirts, current shirt-makers producing more shirts, and other firms deciding to begin making shirts -- any shortage will soon be eliminated. In a market economy, it doesn't take a central planning committee to make any of these decisions. In fact, the process happens faster, and in some sense automatically, precisely because consumer and producer decisions are decentralized.Market economies provide no magic solutions to economic problems, however. Government plays a critical role in helping correct problems that can't be fully solved by a system of private markets. In a market economy, costs associated with production are not always paid by the producer. For example, if pollution is a byproduct of manufacturing, it may not be factored into the price that a consumer pays for the product. These external elements are passed on to others who are not party to the production or consumption of goods and services. Governments play a role in addressing negative externalities through laws, regulations or taxes. Moreover, market economies are not necessarily stable or fair to everyone. They are not immune to problems such as inflation (a continual increase in the price of goods), unemployment, pollution, poverty, and barriers to international trade. The primary difference between command and market economies, however, is the extent to which the central government controls the economy.The Role of the Government in the U.S. EconomyRoleExampleThe government regulates competition.FTC (Federal Trade Commission) creates rules about trade and enforces antitrust laws that discourage the development of monopolies.The government regulates businesses through several different agencies.The government establishes agencies to administer and enforce laws about:FCC (Federal Communications Commission) - communications by radio, television, wire, satellite and cableEPA (Environmental Protection Agency) - human interactions with the environmentFDA (Food and Drug Administration) - food and medicinesThe government provides public goods and services.Bridges and interstate highwaysPostal servicesNational defenseThe government regulates the money supply.The Federal Reserve System acts as a central bank.The government protects people’s health and safety.The government establishes agencies to administer and enforce laws about:EPA (Environmental Protection Agency) - human interactions with the environment.FDA (Food and Drug Administration) - food and medicinesConsumer Product Safety Commission - unsafe consumer products ................
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