Economics 102 The Free Market, Central Planned, Command and Mixed Economy By Mr. Poitier.

Economics 102Economics 102The Free Market, The Free Market, Central Planned, Central Planned, Command and Command and

Mixed EconomyMixed Economy

By Mr. PoitierBy Mr. Poitier

Why Markets Exist?Why Markets Exist?

Market – an arrangement that allows Market – an arrangement that allows buyers and sellers to exchange things.buyers and sellers to exchange things.

Specialization – the concentration of the Specialization – the concentration of the productive efforts of individuals and firms productive efforts of individuals and firms on a limited number of activities.on a limited number of activities.

Household – a person or group of Household – a person or group of people living in the same residence.people living in the same residence.


Firm – an organization that uses Firm – an organization that uses resources to produce a product, which it resources to produce a product, which it then sells.then sells.

Factor market – market in which firms Factor market – market in which firms purchase the factors of production from purchase the factors of production from households.households.

Profit – the financial gain made in a Profit – the financial gain made in a transaction.transaction.


Product Market – the market in which Product Market – the market in which households purchase the goods and services households purchase the goods and services that firms produce.that firms produce.

Self-interest – one’s own personal gain.Self-interest – one’s own personal gain. Incentive – an expectation that encourage Incentive – an expectation that encourage

people to behave in a certain way.people to behave in a certain way. Competition – the struggle among producers Competition – the struggle among producers

for the dollars of consumers.for the dollars of consumers.


Invisible hand – “Laissez faire” – which Invisible hand – “Laissez faire” – which means, “Let them do as they please.” means, “Let them do as they please.” Economists use this term to describe the Economists use this term to describe the self regulating nature of the marketplace.self regulating nature of the marketplace.

Consumer Sovereignty – the power of Consumer Sovereignty – the power of consumers to decide what gets consumers to decide what gets produced.produced.

Advantages of the Free MarketAdvantages of the Free Market

1.1. Economic Efficiency – Because it is self Economic Efficiency – Because it is self regulating, a free market economy regulating, a free market economy responds efficiently to rapidly changing responds efficiently to rapidly changing conditions. Producers make only what conditions. Producers make only what consumers want, when they want it and consumers want, when they want it and at prices they are willing to pay. (ex at prices they are willing to pay. (ex PS3)PS3)


2. Economic Freedom – Free market economies 2. Economic Freedom – Free market economies have the highest degree of freedom of any have the highest degree of freedom of any system. The freedom of workers to work system. The freedom of workers to work where they want and producers to make what where they want and producers to make what they want.they want.

3. Economic Growth – Because competition 3. Economic Growth – Because competition encourages innovation, free market encourages innovation, free market encourage growth. Entrepreneurs are always encourage growth. Entrepreneurs are always seeking profitable opportunities and seeking profitable opportunities and contribute new ideas and innovations.contribute new ideas and innovations.


4. 4. Additional Goals – Free Markets offer a Additional Goals – Free Markets offer a wider variety of goods and services than wider variety of goods and services than any other system, because producers any other system, because producers have incentives to meet consumers have incentives to meet consumers desires.desires.

Adam SmithAdam Smith

Adam Smith was author of the Wealth of Adam Smith was author of the Wealth of Nations, published in 1776. This book stills Nations, published in 1776. This book stills stands as the authoritative description of how stands as the authoritative description of how a market system can flourish.a market system can flourish.

Smith details in the book that land, labor and Smith details in the book that land, labor and capital are factors of production that generate capital are factors of production that generate a nations wealth. In Smith’s view, individuals a nations wealth. In Smith’s view, individuals left alone to try to better themselves will left alone to try to better themselves will produce a multiplication of riches, jobs and produce a multiplication of riches, jobs and goods and services.goods and services.

The Centrally Planned The Centrally Planned EconomyEconomy

Central Planned Economies operate in direct Central Planned Economies operate in direct contrast to free market systems. Centrally contrast to free market systems. Centrally Planned Economies oppose private property, Planned Economies oppose private property, free markets pricing, competition, and free markets pricing, competition, and consumer choice.consumer choice.

Unlike in a Free Market. A Central Planned Unlike in a Free Market. A Central Planned Economy dictates what gets produce and Economy dictates what gets produce and consumed. The government answers the consumed. The government answers the Three Economic QuestionsThree Economic Questions..

THREE ECONOMIC THREE ECONOMIC QUESTIONSQUESTIONS

What goods and services should be What goods and services should be produced?produced?

How should these goods and How should these goods and services be produced?services be produced?

Who consumes theses goods and Who consumes theses goods and services?services?

Central Planned EconomyCentral Planned Economy

Central Planned Economy owns the three (3) Central Planned Economy owns the three (3) Factors of Production Land, Labor (They tell Factors of Production Land, Labor (They tell where individuals work and wages) and where individuals work and wages) and capital.capital.

Since the government, dictates what is Since the government, dictates what is produced and the price. Consumers do not produced and the price. Consumers do not have consumer sovereignty.have consumer sovereignty.

Central Planned EconomyCentral Planned Economy

Centrally Planned Economies are often Centrally Planned Economies are often associated with socialism and associated with socialism and communism. These terms are often communism. These terms are often confused but they are different.confused but they are different.

SocialismSocialism – a social and political – a social and political philosophy based on the belief that philosophy based on the belief that democratic means should be used to democratic means should be used to evenly distribute wealth throughout a evenly distribute wealth throughout a society.society.

Centrally Planned Centrally Planned EconomyEconomy

CommunismCommunism – a political system characterized – a political system characterized by a centrally planned economy with all by a centrally planned economy with all economic and political power resting in the economic and political power resting in the hands of the central government.hands of the central government.

AuthoritarianAuthoritarian – requiring strict obedience to an – requiring strict obedience to an authority, such as a dictator.authority, such as a dictator.

CollectiveCollective – – large farm leased from the state to farm leased from the state to groups of peasant farmers.groups of peasant farmers.

CommunismCommunism

Karl Marx (Marxism) and Friedrich Engels introduced socialist philosophy in the Communist Manifesto. The term communist was adopted by Vladimir Lenin when he took control of Russia in 1917.

The Soviet UnionThe Soviet Union The former Soviet Union is a great example of how a The former Soviet Union is a great example of how a

Centrally Planned Economy works and doesn’t work.Centrally Planned Economy works and doesn’t work. The Soviet Union rose out of the revolutions in Russia The Soviet Union rose out of the revolutions in Russia

1917. The Czar Nicholas II and his family were forced 1917. The Czar Nicholas II and his family were forced from the throne and machine gunned in the Russian from the throne and machine gunned in the Russian Forest.Forest.

The Soviet Agriculture was based on collectives the The Soviet Agriculture was based on collectives the farms were leased from the state. Workers were farms were leased from the state. Workers were guaranteed employment and income. Under this guaranteed employment and income. Under this system, farmers had few incentives to grow more or system, farmers had few incentives to grow more or better crops. better crops. Heavy IndustryHeavy Industry – that requires a large – that requires a large capital investment and that produces items used in capital investment and that produces items used in other industries.other industries.

Soviet UnionSoviet Union

Soviet Consumers suffered due to goods Soviet Consumers suffered due to goods were scarce and poor in quality. (ex. Suit were scarce and poor in quality. (ex. Suit companies made suits poorly stitched and companies made suits poorly stitched and mismatched coats and pants.) People mismatched coats and pants.) People waited in line for hours to buy goods and waited in line for hours to buy goods and services.services.

Problems with Centrally Problems with Centrally Planned EconomiesPlanned Economies

Centrally Planned Economies greatest Centrally Planned Economies greatest disadvantage is that performance always fall short disadvantage is that performance always fall short of the ideals upon which the system is built.of the ideals upon which the system is built.

The government owns all production and workers The government owns all production and workers lack incentive to innovate and work hard. The lack incentive to innovate and work hard. The government actively discourages change.government actively discourages change.

These economies lack the flexibility to adjust to These economies lack the flexibility to adjust to consumer demands.consumer demands.

This kind of economy sacrifice individual freedom This kind of economy sacrifice individual freedom in order to pursue societal goals.in order to pursue societal goals.


The Mixed Economy – market based The Mixed Economy – market based economic system in which government economic system in which government plays a limited role. This mix of economy plays a limited role. This mix of economy and government intervention allows for a and government intervention allows for a stable marketplace.stable marketplace.

The limits of Laissez Faire have been The limits of Laissez Faire have been exposed because some needs and wants of exposed because some needs and wants of modern society are difficult to answer in the modern society are difficult to answer in the marketplace.marketplace.


Private PropertyPrivate Property – is property that is owed – is property that is owed by individuals or companies not by the by individuals or companies not by the government. The Constitution protects this government. The Constitution protects this right.right.

A society must assess its values and A society must assess its values and prioritize its economic goals. Some are prioritize its economic goals. Some are better met through the open market and better met through the open market and others by government action.others by government action.

Mixed EconomyMixed Economy The government can enter the circular flow of economic The government can enter the circular flow of economic

activity in many ways. This shows the government role in a activity in many ways. This shows the government role in a Mixed Economy.Mixed Economy.

Government in the Factor Government in the Factor MarketMarket

Just like a business the government buys Just like a business the government buys the factors of production (Land, Labor and the factors of production (Land, Labor and Capital) from households.Capital) from households.

Emenient DomainEmenient Domain - - When property is When property is taken either for taken either for government use or by use or by delegation to third parties who will devote delegation to third parties who will devote it to public or civic use or, in some cases, it to public or civic use or, in some cases, economic development. economic development.

Government in the Government in the Product MarketProduct Market

Government purchase goods and services Government purchase goods and services in the product market. (Office supplies, in the product market. (Office supplies, telephones, computers, and fax machines)telephones, computers, and fax machines)

The government provide certain goods and The government provide certain goods and services through the factor resources that services through the factor resources that they combine. The Federal, State, and they combine. The Federal, State, and Local Government provide 4 million miles of Local Government provide 4 million miles of road.road.

Transferring MoneyTransferring Money

Governments collect taxes from both Governments collect taxes from both households and businesses. Governments households and businesses. Governments then transfer the money they collect to then transfer the money they collect to businesses and individuals for a variety of businesses and individuals for a variety of reasons ranging from worker disability to the reasons ranging from worker disability to the survival of an industry.survival of an industry.

The greatest expenditure of the United The greatest expenditure of the United States government is Social Security. States government is Social Security. (Safety Net)(Safety Net)

Comparing Mixed Comparing Mixed EconomiesEconomies

The foundation of the United States economy is The foundation of the United States economy is the free market.the free market.

Free EnterpriseFree Enterprise – is characterized by private – is characterized by private or corporate ownership of capital goods. or corporate ownership of capital goods. Investments that are determined by private Investments that are determined by private decision rather than by state control and decision rather than by state control and determined in a free market.determined in a free market.

ContinuumContinuum – a range with no clear divisions. – a range with no clear divisions. One end of the scale is Centrally Planned and One end of the scale is Centrally Planned and

the other end is Free Market. Mixed is in the the other end is Free Market. Mixed is in the middle.middle.

Mixed Economy with Mixed Economy with Government DominatesGovernment Dominates An economy that is mixed with government An economy that is mixed with government

domination. This occurs where government domination. This occurs where government owns all the property and all economic owns all the property and all economic output. (Ex. North Korea and China)output. (Ex. North Korea and China)

The Chinese economy is in The Chinese economy is in TransitionTransition – a – a period of change in which an economy period of change in which an economy moves away from a centrally planned moves away from a centrally planned economy toward a market-based system.economy toward a market-based system.

PrivatizePrivatize – to sell state-run firms to – to sell state-run firms to individuals.individuals.

Economics 102 The Free Market, Central Planned, Command and Mixed Economy By Mr. Poitier.

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Transcript of Economics 102 The Free Market, Central Planned, Command and Mixed Economy By Mr. Poitier.