AP Macro Unit I Notes part B

The idea of any economic system is to answer the fundamental questions of what, how, and for whom to produce.

Capitalist Ideology:
A capitalist society must have:
1) Private Property: Individuals must have free control of property. They must be able to control, use and dispose of that property as they see fit.

2) Freedom of Enterprise and choice: must be able to produce and sell Goods and Services. There should be no government restrictions.
Owners must be able to use Goods and services in any way they see fit.
Workers must have access to any occupation they see fit.
Consumers must have access to all goods and services (at a price)

3) Role of Self Interest:
All parties must be free to try and get the most out of the system. (seller tries to get a high price while the buyer tries to get a low price.

4) Competition: Large number of buyers and sellers each free to enter and exit the market
If you have a large number of buyers and sellers this means none will be able to influence the price. (WHAT will happen if one seller decided to increase the price of his goods?)

5) Markets and Prices:
Capitalism is a market economy.
Market: simple mechanism or arrangement which brings buyers (demanders) and sellers (suppliers) of goods and services together.
Though price, the market decides what is to be produced, for whom and how.

6) Limited Government Interaction:
The market must be self regulating. As soon as government steps in it upsets the balance.

7) Use of capital goods:
Capital Goods: goods used in production (buildings, equipment...)

8) Division of Labor:
Individuals specialize in tasks. They then allow others to do jobs for them.

9) Use of Money as a medium of exchange. (very little bartering)

10) Specialization of tasks: We produce very little of what we consume. Instead we trade our services for money and money for goods and services.
Traditional Economy
Allocation of scarce resources stems from ritual, habit and custom. Individuals are not free to make decisions based on their wants. Roles are defined by the customs of their ancestors. Strengths: Everyone knows WHAT to produce, HOW to produce and FOR WHOM to produce. Life is stable, predictable and continuous.
Weakness: Discourages new ideas. Lack of progress usually leads to a lower standard of living. Traditional economies offer few choices.
Command Economy
A central authority (usually government) makes decisions. The people are expected to follow the commands of the authority. The central authority defines their needs and wants.
Strengths: If circumstance requires a quick change in allocation of resource it can meet this need rapidly.
Weaknesses: They are not designed to meet the wants and needs of the people. People have little incentive to work hard in a command economy because they will get paid by meeting quota. Require huge bureaucracies to make decisions. This slows the day to day decisions. It also raises costs. Little flexibility to deal with day to day problems. Decisions must be made with approval from above. People have trouble getting ahead in a command economy.
Market Economy
People and business decide how to allocate resources. A market allows buyers and sellers to meet to exchange goods and services. The dollar forces decisions instead of central authority or customs.
Strengths Markets can adjust over time. Producers can decide WHAT to produce and HOW to produce. This leads to greater efficiency in the market. Small degree of Government interference. Individual decisions direct the use of scare resources. A very large variety of goods will be produced because there are buyers. Both majority and minority get what they want.
Weakness: The FOR WHOM part is weak. Sometimes competition is not as great as it should be. If market fail to meet needs and wants this system breaks down. It only rewards production, so those who do not produce suffer. (Young, old, sick.)
Chapter 19 (section 1)
Capitalism: an economic system in which private individuals and businesses own the factors of production. Supply and demand determines the prices in a capitalist economy.
Advantages of Capitalism: More efficient than communism and socialism Produces more, higher quality goods at lower prices than other two systems. Allows for individual freedom. People are allowed to use their time, energy, talent, and resources as they see fit People can keep profits if they make them Capitalist economies are flexible People will not buy the products if they do not want them so……. Business is motivated to listen to consumer Suppliers must find product people want or go out of business Consumer is sovereign Suppliers have to adjust to meet consumer demands.
Disadvantages of Capitalism: Pure capitalism does not meet the needs of the least skilled, the disabled, the young, old or least productive.
Socialism: many of the basic productive resources are government owned and operated. Prices play a major role in distribution.
Advantages of Socialism: Takes care of those that can not afford the benefits of society People elect officials who make economic decisions.
Disadvantages of Socialism: Less efficient because business have no incentive to cut costs. Special interests often take over.
Communism: both a political and economic framework, all property is collectively owned and labor is organized for the common advantage of the community.
In theory goods and services have no prices so there is no need for payment for the factors of production.
Advantages of Communism: Workers can not be fired. Many pubic good provide
Disadvantages of Communism: Individual freedom is lost. (little or no freedom to choose jobs or change jobs) Lack of incentives to produce what is wanted by society Inefficiency of centralized planning.



Unit 1 Lesson 4

Absolute and Comparative Advantage

Input vs. Output:
Output problems state that you get a certain amount of product out of a given input. Examples miles per gallon, pieces of gum per dollar...
Input problems state that it takes a certain amount of input to get a given product. Examples are hours to do a job, apples to make a pie,

Absolute Advantage:
For output problems you look at if one nation (individual/company) can produce more output with the same resources as the other.
For Input Problem: you look at who uses the least amount of input to get the output.



You can see that Ted can produce 70 tons in an hour while Nancy can only produce 40 tons of milk in an hour. It makes sense that Ted should produce Milk because he has the absolute advantage in milk
On the other hand Nancy can produce 45 tons of cheese to Teds 15 tons. Therefore Nancy produces Cheese. She has the absolute advantage in Cheese.









For Input Problem: you look at who uses the least amount of input to get the output.


You can see that it takes X 2 hours to build a car and Z 3 hours. Therefore X should build the car. It takes Z one hour to build a tank but it takes X 2 hours. Therefore Z should build tanks.
Comparative Advantage:
One nation (individual/company) can produce a good at a lower opportunity cost than the other. This comes into play when one individual (nation, company....) has the absolute advantage in both.

Using numbers to calculate who has comparative advantage

Output method: put the output of each product over the output of the other product for the same person. This makes a fraction. Look at the opportunity cost. The person with the lowest opportunity cost should produce the good that costs the least.


Example:



Notice that Mike can produce more Corn and Wheat. He has absolute advantage in both. Does this mean he should produce both. NO!!! He should produce the one that he has comparative advantage in and then trade for the other.


You will never have a situation where someone has comparative advantage in both!!!!!
Input Method: divide the input required for each product into the input for the other product. Then take the one with the lowest opportunity cost.
Based on this we can see that it takes Jeff less apples to make a pie than Judy. It takes the same amount to make juice. You must then figure out who has absolute advantage. Reduce it:
5/3 is less than 6/3 so Jeff should produce pie. 3/6 is less than 3/5 so Judy should produce Juice.
People trade because both parties benefit from voluntary exchanges. This is true even if one nation has both a comparative and absolute advantage.

Terms of Trade: the rate by which one unit of a good or service is traded for another unit of a good or service such that they do better trading than they do on their own.

Why Specialize?
1. more efficient use of resources
2. increased production without increase in resources
3. increase division of labor


What happens to the production possibility curve when specialization occurs? (It is actually a trading possibilities curve.)



Circular Flow Diagram:

Two groups of decision makers: Households and Business (later the government will be added.)

The market coordinates these two groups.

The upper half of the diagram portrays the resource market (also called factor market). It is through the resource market that households supply the resources for the business. (Land, Labor, Capital, Entrepreneurial Ability) Notice that through this market that the business demand resources.


The lower portion of the diagram represents the product market. It is through this market that the households spend the money they receive through he resource market. Here the household is the demander and the businesses are the suppliers.

Scarcity and opportunity costs enter in this market through the supply of resources by the households. They only have a limited amount of resources to provide and therefore have an opportunity cost in everything
they provide.

When you write a free response question in this class each question must be answered on a separate piece of paper. They must be labeled clearly so that I can tell what question and what part they are working on. Graphs must be at least 7 lines big or I will not give you credit!