Why “mixed” and not “market”?

(2) How is it produced?

(1) What gets produced?

Economics 2005 Increasing opportunity cost • PPFs are bowed out from the origin. • This is because not all of society’s inputs are equally good at making each  product. • In other words, as we make more and more of one good, we are using more and more of society’s resources to make that good. • Some of those resources may not be well suited to producing that product. • If this is the cWe also discuss several other topics like shane walsh umd
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ase, you would have to use A LOT of those resources to make  even a little more output (thus leaving less for the other product that society  makes). Scarcity, Choice, and Opportunity Cost Negative Slope and Opportunity Cost marginal rate of transformation (MRT) The slope of the production possibility frontier (ppf). Scarcity, Choice, And Opportunity Cost Economic Growth economic growth An increase in the total output of an economy. It occurs  when a society acquires new resources or when it learns to produce more  using existing resources. Shifting the PPF •Things that can shift the PPF: 1. Changes in resource availability • Size, health, skill of labor force •  Availability of other resources 2. Increases in capital stock• More output 3. Technological change • Employs resources more efficiently 4. Improvements in the rules of the  game • Formal and informal institutions • Economic growth Consuming today vs. consuming tomorrow Capital Goods and Consumer Goods consumer goods Goods produced for present consumption. capital goods Goods that are used in the production of other goods and  services. investment The process of using resources to produce new capital. Because resources are scarce, the opportunity cost of every investment in  capital is forgone present consumption. Consuming today vs. consuming tomorrow •The more we (as a society) invest today, the more we can consume  tomorrow. •The more we consume today, the less there is left over for tomorrow. •Every society (as well as every person) faces the decision of how much to  consume today vs. how much to consume tomorrow. Consuming today vs. consuming tomorrow •This decision, like all economic decisions is based on expected costs and  benefits of the choices involved. •This is another example of opportunity cost -the cost of consumption today is consumption tomorrow and vice-versa.Poor countries and the vicious cycle of poverty • Very poor countries cannot afford to invest much at all as all available  resources are used to keep people alive and keep society operating. • Because of this they can never build enough capital to pull themselves out  of poverty – and they therefore remain poor. • Rich countries can consume a lot AND invest a lot in new capital – which  makes them even richer over time. Economic Systems TRADITIONAL ECONOMIES traditional economy An economy in which tradition alone determines the  nature of economic activity. Tradition answers all three questions. Example: Shell trading in the Trobriand Islands. Necklaces go clockwise,  armbands counterclockwise. COMMAND ECONOMIES command economy An economy in which a central government either  directly or indirectly sets output targets, incomes, and prices. (aka “centrally  planned”) Those in charge answer all three questions. Example: North Korea, Cuba in the 1980s and 90s (not as much today). Economic Systems LAISSEZ-FAIRE OR MARKET ECONOMIES: THE FREE MARKETlaissez-faire or market economy (aka pure capitalism) Literally from the  French: “allow [them] to do.” An economy in which individual people and  firms pursue their own self-interests without any central direction or  regulation. The market determines what is produced, how it is produced,  and who gets it. market The institution through which buyers and sellers interact and engage  in exchange. Economic Systems Market Economies •Market economies are based on the concept of private ownership. •“Ownership” means that people should be able to do what they want with  the things they buy (so long as no one else gets harmed) and prevent others  from using them (more on this later in the course). Market Economies consumer sovereignty The idea that consumers ultimately dictate what will  be produced (or not produced) by choosing what to purchase (and what not  to purchase). free enterprise The freedom of individuals to start and operate private  businesses in search of profits. Market Economies are also based on the ideas of Consumer Sovereignty and Free Enterprise Market Economies •Examples: No pure market economies. Hong Kong and New Zealand may  be closest. •United States is “mostly” a market economy.3 Questions in a Market Economy (1) What gets produced? Determined by people “voting” with their dollars  (demand). •“Voting patterns” change over time. •Some things get no votes - so don’t get produced. •Voting can vary by  region. (2) How is it produced? Determined by the cost of production and the  preferences of consumers. •Different materials or technologies are available. (3) Who gets it? Those who pay for it. The United States (as do most countries) has a mix of all three types of  economy. Traditional: Tipping Command: Welfare, Roads, USDA Market: iPhones, Twix Bars, most stuff Economic Systems MIXED SYSTEMS, MARKETS, AND GOVERNMENTS The differences between traditional economies, command economies and  laissez-faire economies in their pure forms are enormous. In fact, these pure  forms do not exist in the world; all real systems are in some sense “mixed.” Economic Systems Why “mixed” and not “market”?Even staunch defenders of the free enterprise system recognize that market  systems are not perfect. •First, they do not always produce what people want at lowest cost—there  are inefficiencies. •Second, rewards (income) may be unfairly distributed,  and some groups may be left out. •Third, periods of unemployment and  inflation recur with some regularity. •There are also things called “market  failures” that may cause more inefficiency (more on this later). Because of  these issues, the government is often needed to “fix” what is wrong with the  system.