Econ Chapter 1 Topic 3
Econ Chapter 1 Topic 3 ECON 201
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This 10 page Class Notes was uploaded by Randi myers on Tuesday September 8, 2015. The Class Notes belongs to ECON 201 at University of Tennessee - Knoxville taught by Dr. Ken Baker in Fall 2015. Since its upload, it has received 22 views. For similar materials see Intro to Economics in Economcs at University of Tennessee - Knoxville.
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Date Created: 09/08/15
9 8 15 634 PM ITheCircular Flow Model Labor Jaw Services AAAynp AA A w A n n wNaua M H h H Factor market 0 Factor markets input marketsquot where your wage is determined 0 Product markets where prices of goods and services are determined What is output and how do you measure it In Physical Units ars 15000000 New homes 800000 Computers 110001000 Total In Monetary Terms 15 l l llIIIOW 9quot 30000 050 million 800000 250000 szoo bullion 2 million 9 300 su bllllli0 Total total 651400000000 GDP 0 output and production comes in units 0 barrels of oil tons of steel etc 0 however you cant aggregate those into a meaningful statistic 0 So all final production is converted into market value what it sells for o This number is GDP and represents the total value of a country s yearly production Standard of Living and Economic WellBeing o Is the US the richest country in the world 0 Economists measure economic wellbeing as the standard of living 0 Rich countries have high standard of living because they have high GDP per person 0 Poorer countries have less GDP per person 0 Is this even the best way to measure economic well being 0 What does that even mean 0 Standard Of living GDP output Population 0 GDP per person 0 The higher the number higher standard of living The US economy 0 US contains 7 of the worlds total land 0 3rd largest country 0 US contains less than 5 of the worlds population 0 US produces between 15 and 14 of the worlds total output 22 0 US is the largest economy in the world by most measures 0 US has higher GDP by about 3 times compared to china 0 Economic size GDP 0 Economy grows faster than population means GDP per person is rising Economic systems 0 Different ways to address scarcity and the three questions 0 Economic system The organization and methods used by a society to provide for its people that is answer its three queonns 0 Determine what goods and service are produced 0 How they are produced 0 How to split them up 0 Three main types 0 Traditional economies 0 Command economies 0 Market economies Traditional economy 0 Answers three questions the way they always have been answered 0 Follow rules and ways of past 0 if it was good enough then it is good enough nowquot 0 how crops are planted how they are harvested changed little over time o examples Amish Ainu in Canada some tribes in Amazon 0 Less friction Everyone understands and accepts roles 0 High sense of community Your sense of self worth is tied to the harmony and smooth functioning of community Cons 0 Restriction on individual freedom and initiative 0 Slow if any economic growth 0 Slow if any progress in standard of living 0 Slow if any technological advancement Command economy 0 Answers three questions through the decisions of central authority gure leaderdictator 0 Central planners map out the workings of the economy own the factors of production and 0 Determine how much to produce 0 Determine how to produce 0 Determine allocation Requires extensive planning and vast numbers of committees 0 Examples Old USSR 0 Pros 0 Can institute change rapidly There is no debate or discussion 0 Can provide economic security to all citizens Food clothing shelter education medical care safety etc 0 Can make distribution of incomewealthresources more equitable Cons 0 Extremely difficult to accurately calculate and produce correct amount of GampS Almost always too much of one thing and not enough of another 0 Quality usually suffers o Lends itself very easily to corruption Market Economy 0 Answers three questions through the use of markets and the prices system 0 Prices will answer our questions 0 How much food etc o How to produce them 0 How to split them up o All is accomplished though interactions of countless individuals decision makers Very little role for tradition or central authority 0 Examples America Canada japan western Europe 0 Produces the most possible out of the limited resources available 0 Larger variety of goods and services and better quality 0 Tends to lead to faster economic growth and high standard of living Cons o The division of resourcesincomes wealth can be very uneven 0 Possible misallocation of resources Marketing beanie babies when should be making food 0 Markets can fail under a variety of conditions Pollution worker exploitation no public goods Adam Smith and the invisible hand 0 Much of the market system was introduced to the world via Adam Smith 0 Adam smith considered the father of modern economics 0 Wrote An inquiry into the nature and causes of the wealth of na ons 0 Every modern economics textbook can trace its content to the ideas of him and that book 0 Of many one of the most notable ideas is the power of everyone s individual self interest to somehow guide the economy to utilize its resources in the most efficient way possible An Inquiry into the Nature and Causes of the Wealth of Nations 0 Putting the quotes together 0 1 Individuals motivated by nothing but self interest greed 2 When individual buyers and sellers compete to further their own private interests society actually benefits in fact you actually make society better off better than if you actually planned it 0 3 Thousands or millions of individuals acting selfishly and with no regard for one another or society as a whole can do a better job of organizing an economy than any benevolent planner What is the US 0 There is hardly any functioning system that is either all traditional all command or all market 0 In truth almost every functioning society operates in some sort of mixture between all three 0 Mixed economy where society answer its three questions through some combination of traditional command and market Capitalism 0 An economic system characterized by 0 No state planning of economic activity 0 Resources of production are privately owned and controlled Private citizens decide how to employ resources and inputs n Determine WHAT society makes Private citizens reap the benefits and costs of their use in the form of profits and wages n Guided by greed and profit to determine HOE goods and services are made 0 No set plan of how to allocate goods and services Private citizens through voluntary exchange determine for WHOME goods are made 0 Underlying theme more concerned with private self interest 0 Strengths 0 Economic efficiency Society is capable of producing the biggest economic piequot as possible Motivated by greed self interests and profits n Goods and service produced at lowest cost Prices determine the correct allocation of resources and resources and correct amount produced a Prices answer all three questions 0 Economic freedom Consumers and businesses free to choose Weaknesses 0 Has a natural tendency towards an unequal distribution Everyone rewarded to their own abilities Varying abilities 0 Cases of market failure When market doesn t work as advertised n Too much or too little produced a Poor ability to protect environment working conditions discrimination a Poor provider of public goods schools 0 Karl Marx 0 Was a strong proponent of socialism 0 Was a strong critic of capitalism o Believed the forces of capitalism sowed the seeds of its own demise and was inherently unstable Greed drives and will destroy capitalism 0 Divide people into two groups Capitalists own factories hire workers paid in profits Workers hired by capitalists paid in wages decided by capitalists 0 Only capitalists benefit from free market system workers increasingly left out o Capitalists paid higher in profits become increasingly more wealthy and powerful than workers 0 Capitalists fowling greed will increasingly exploit workers until they finally revolt Socialism Economic system characterized by o Fairly high level of state involvement 0 Resources of production are a miX of state owncontrolled and private ownership State may own and control the larger more vital industries in order to provide better for the public good a Common ones are electricity banking mines healthcare Many industries can be privately owned and controlled Heavy centralized authority involved in final allocation fo goodsservices State may try to even out final distribution through taxes a Higher taxes for rich lower for poor Note THERE ARE LOTS OF WAYS TO IMPLEMENT ABOVE LARGE VARIETY OF SOCIALIST ECONOMIES Strengths o More equitable distribution Economic pie is split more evenly 0 Economic freedom Consumers and businesses free to choose free to make own decisions and choices Weaknesses 0 Not as efficient Pie is smaller Less stuff to split 0 Less impetus for individual innovation and achievement Market doesn t reward and punish economic decisions Why are the Steelers so good and the pirates are not 0 Nfl takes money from advertising and each team gets some 0 Not much capitalism MLBEach team takes money from their own advertising 0 MLB capitalism 0 Pirates stadium is small Less advertising9 less money Harder to buy good players 9815 634 PM 9815 634 PM
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