Chapter 2

Intro
 the survival of any society depends on its ability to provide food, clothing, and shelter
for its people
 economy or economic system
o an organized way of providing for the wants and needs of its people
 the major kinds of economic systems exist
o traditional, command, and market

Traditional economies
 many of our actions spring from habit and custom
 in a society with a traditional economy
 all economic activity stems from ritual, habit, or customs
 habit and custom also dictate most social behavior
 many societies such as African tribes and the Aboriginals are examples of traditional
economies

Advantages
 the main strength of a traditional economy is that everyone knows which role to play
o if you are born into a family of hunters, you hunt
o if you are born into a family of farmers, you farm
 little uncertainty exists over WHAT to produce
 little uncertainty exists over HOW to produce, because you do everything the same way
your parents did
 FOR WHOM question is determined by the customs and traditions of the society

Disadvantages
 The main drawback of the traditional economy is that it tends to discourage new ideas
and new ways of doing thing
 The strict roles in a traditional society have the effect of punishing people who act
different or break rules
 The lack of progress leads to a lower standard of living that in other types of economic
societies

Command Economies
 Other societies have a command economy, one in which a central authority makes the
economic decisions
 Economic decisions are made by the government: the people have little, if any,
influence over how the basic economic questions are answered
Socialism
 Began in 1830s
 Karl Marx
 Communism Manifesto
 o Denounced capitalism
o Objected private ownership
 Idea that government should play a greater role in property which is owned by
individuals

Karl Marx
 All history is a class struggle. When primitive tribalism could no longer provide an
adequate standard of living…slavery developed
 He believed that slavery evolved into feudalism which in turn evolved into capitalism
 In each case he believed that a class struggle developed with each class being pitted
against the other the “haves” against the “have-nots”
 Bourgeoisie (rich)
 Proletarian (workers)
 Once capitalists were relieved of control over the means of production, socialism, then
communism would evolve
 As a result, private property wouldn’t matter and everyone would have a higher
standard of living
 The value of any product was equal to the amount of labor needed to produce it
 Under capitalism, the workday could be divided into two parts
o In one the worker earned his subsistence wage
o In the other, what the worker earned went to the capitalist
 This amounts to exploitation which in time would lead to revolt…the only thing that the
work had to lose were their chains

Rise of Communism in Russia

 1917 – Russia was backwards, agrarian, and poor un Czar Nicholas II
 1917 – the Russian revolution under Vladimir Lenin
o creation of the Soviet Union
 1918 – Russia withdraws from WWI
o treaty of Brest-Litovsk
 1918 – US and Great Britain invade Russia to aid the white forces
o Lenin
o Failure, Lenin freaks out
 1918-24 Lenin’s NEP
 1924-1953 – Stalinism 5-year plan

Advantages
 the main strength of a command system is that it can drastically change macro-
economic direction in a short period of time
 the USSR went from an agrarian to an industrial economy in just a few decades
o at a tremendous cost
 little uncertainty in this type of economy
  most command economies tend to provide minimum levels of education, health, and
other public services with little cost to the people
Disadvantage
 requires a large-decision making bureaucracy
 does not give people the incentive to work hard and the results are often unexpected
o can’t be unemployed
 it is not designed to meet the wants of consumers, even though many basic needs are
provided
 does not have the flexibility to deal with minor, day-to-day problems
 people with new or unique ideas find it difficult to get ahead in a command economy

Market Economies
 people and firms acting in their own best interests make the economic decisions
 market is any arrangement that allows buyers and sellers to conduct transactions
 Canada, Japan, US, South Korea, Singapore, Germany, France, Great Britain
 Market economy can adjust to change

Adam Smith
 Wealth of Nations – 1776
 Private enterprise should be free from all government interference – Laissez Faire
 Individuals bring about greatest good
 Concept of invisible hand

Advantages
 High degree of freedom
 Relatively small degree of government interference
 Decision making is decentralized
 Incredible variety of goods and services available to consumers
 High degree of consumer satisfaction

Disadvantages
 Does not provide for everyone
 Some members may not be able to fend for themselves
 Does not provide enough of the services that people value highly
 High degree of uncertainty

Economic Freedom
 In the United States, people place a high value on the freedom to make their own
economic decisions
o People like to choose their own occupations, employers, and uses for their
money
o Business owners like the freedom to choose where and how they produce
Economic Efficiency
 Most people recognize that resources are scarce and that factors of production must be
used wisely
o If resources are wasted, fewer goods and services can be produced

Economic Equity
 Americans have a strong sense of justice, impartiality, and fairness
 Many people believe in equal pay for equal work
o Illegal to discriminate on the basis of age, sex, race, religion, or disability in
employment
 Most people feel that advertisers should not be allowed to make false claims about their
products

Economic Security
 Americans desire protection from such adverse economic events as layoffs and illnesses
 States have set up funds to help workers who lose their jobs
 Congress has set up Social Security
o Federal program of disability and retirement benefits that covers most working
people
o Refers to the federal Old-Age, Survivors, and Disability Insurance (OASDI)
program
o Encompasses several social welfare and social insurance programs
 Supplemental Security Income (SSI)
 State Children’s Health Insurance Program
 Grants to States for Medical Assistance Programs (Medicaid)
o Possible solutions
 Cut benefits
 Adjust cost of living
 Privatizing social security
 Work longer
 Die earlier

Pensions
 A regular payment in a private place of employment to provide retirement income and
security
 2 broad categories
o defined benefit plan
 know in advance what your distributed monthly income payment will be;
based on years of service, and contributions by employer and employee
o defined contribution plan
 don’t know in advance what distributed monthly income payment will
be; based on market fluctuations (i.e. if stocks go up, more money in
portfolio; vice-versa)
 o types
 401k(403b)
 privately funded annuity to provide for retirement purposes
 contributions tax deferred
 IRA (indivudal retirement account)
 A retirement certificate of deposit
 Contributions tax deferred
 Roth IRA
 A retirement certificate of deposit
 Contributions are taxed presently
 Simple IRA
 Savings incentive match plan
 Employer and employees contribute
 Contributions are tax deferred
 SEP IRA (Simplified Employee Pension)
 Only the employer contributes
 Contributions are tax deferred
Employment
 Full employment
o When people work, they earn income for themselves while they produce goods
and services for others
 Price stability
o Another goal is to have stable prices
o Inflation
 Rise in the general level of prices
 Workers need more money to pay for food, clothing, and shelter
 Economic Growth
o Needed to that people can have more foods and services
o Nation’s population is likely to grow, economic growth is necessary to meet
everyone’s needs

Trade-Offs Among Goals

 People sometimes have different ideas about how to reach a goal
 Goal themselves might conflict with one another because even economic policies have
opportunity costs
 Individuals, businesses, and governments are usually able to resolve conflicting goals
through the use of compromise or tradeoffs
 U.S. economic system is flexible enough to accommodate these trade-offs and still to
satisfy the majority of Americans
Private Property
 Includes tangible items such as houses and cars and intangible items such as skills and
talents
 People are free to make decision about their property and their own abilities
 Free to use or abuse as long as it doesn’t harm anyone
 Gives people the incentive to work, to save, and to invest

Contracts
 “sanctity of contract”
o an agreement regarding the use of private property
 2 types
o oral (verbal)
o formal
 written agreement describing work, services, or products that need to be
completed or delivered

Role of the Entrepreneur

 entrepreneurs are the ones who start up new businesses such as restaurants,
automobile repair shops, Internet stores, and video arcades
 risk is important and should be rewarded
 the greater the risk….the greater the reward should be?

Role of the Consumer

 in the US, consumers often are thought of as having power in the economy because
they determine which products are ultimately produced
 consumer sovereignty
o describes the role/power of the consumer as a sovereign or ruler in controlling
the marketplace
o The idea that the customer is always right

Role of Government
 Government – whether national, state, or local – has an economic role to play that
reflects the desires, goals, and aspirations of its citizens
 The government has become a protector, provider of goods and services, consumer,
regular, and promoter of national goals
 Protector
o US enforces laws such as those against false and misleading advertising, unsafe
food and drugs, environmental hazards, and unsafe automobiles
o Also enforces laws against abuses of individual freedoms
o Protects property rights, enforces contracts, and generally tries to make sure
that everyone follows the rules of the game to ensure an efficient and fair
economy
 Provider
o All levels of government provide goods and services for citizens
 National gov’t supplies defense services
 State gov’ts provides education and public welfare
 Local gov’ts provide thinks like parks, libraries, and bus services
 Consumer
o Gov’t consumes factors of production just like any other form of business
 Regulator
o National gov’t is charged with preserving competition in the marketplace
o Wall street = securities exchange commission
o Also oversees interstate commerce, communications, and even entire industries
such as banking and nuclear power
o Department of commerce (FCC, FDA, NHTSA)
 Regulates utilities = power, water
 Zoning, cable, construction permits, licenses, schools, etc.
 Promoter of National Goals
o Reflects the will of a majority of its people
 Many gov’t functions reflect people’s desire to modify the economic
system to achieve the economic goals of freedom, efficiency, equity,
security, full employment, price stability, and economic growth
 Gov’t programs such as Social Security, as well as laws dealing with child
labor and the minimum wage, reveal how Americans have modified their
free enterprise economy
 Because of these modifications, and because there are some elements
from all 3 systems in our economy, the US is said to have a mixed
economy, or a modified private enterprise economy
 Today, most modern economies are said to be “mixed”
economies because they combine aspects from all 3 economic
systems
 The 5 roles reflected by the government’s involvement in the economy are greatly
influenced by two economists:
o John Maynard Keynes
 (1883-1946)
 “The General Theory of Employment, Interest and Money” 1936
 argued
 during the Great Depression that not everyone who was out of
work wanted to be
o some had just entered labor market and couldn’t find jobs
o some had quit their jobs and hadn’t found others
o some businesses found it unprofitable to hire
 too little spending in the economy causes high unemployment
 an economy’s total spending was the sum of three groups
o consumers
 o businesses
o government
 government should increase spending or lower taxes
(expansionism; fiscal policy)
 if total spending does not result in a job for everyone willing to work and
the private sector isn’t willing to spend more to provide jobs, then the
gov’t must spend to make up the difference even if it means going into
debt

o John Stuart Mill
 1806-1873
 British Philosopher and Economist
 British East India Company
 Member of Parliament
 “Principles of Political Economy” 1848
 challenged the traditional idea that goods and services were distributed
by natural law
 he believed that the distribution of goods and services could be
controlled
 favored
 individual liberties
 need for safeguards against the tyranny of the majority
 social and political reforms
 emancipation of women
 development of labor organizations and farm cooperatives
 believed
 through tech change, the working class could have a better future
and higher standard of living
 gov’t should intervene to
o improve the lower class
o preserve competition
o protect against monopolies
o safeguard the rights of individuals
 in free trade, international specialization and division of labor
 in the “Principle of Comparative Advantage,” it states that if
countries produce that which they can produce most efficiently,
total production will be greater
 Healthcare in America: “Obamacare” and You
 Health insurance
o A contract between you and your insurance company
o You buy a plan, company agrees to pay part of your medical costs when you get
sick or hurt
 Why have it
o No one plans to get sick
o Covers prescriptions
 Vaccines
 Doctor’s visits
 Hospital stays

How it Works
 Premium
o Money you pay to your insurance company every month
 Deductible
o Amount of money you pay for healthcare before the insurance company starts to
pay its share
 Low deductible
 Highly monthly premiums
 High deductible
 Low monthly premiums
 Copayment
o Amount you’ll pay for a medical service after you’ve met your deductible
 i.e. you pay for $25 for a visit to the doctor’s office that would cost $150
if you didn’t have coverage

Paying for Medical Care without Insurance

 average costs
 stay in hospital
o $10,000 a day
 fix a broken leg
o $7,500
 Deliver a baby
o $9,000-$17,000
 Ambulance ride
o $800
 stitches
o $1,100
 visit to ER
o $2,000
 Critical care/Surgery
o $20,000
Who Can’t Get Health Insurance?
 Before Obamacare
o Low income citizens
o People with pre-existing conditions
 Birth defects
 Cancer
 HIV/AIDS
 Very expensive for
o Senior citizens
o Smokers
o Severely overweight
o Sick people