Chapter 2 Flashcards
production
any activity that results in the conversion of resources into products that can be used in consumption
input -> output goods
resources or factors of production
inputs
land, labor, physical capital, human capital
land
natural recourses
labor
people, workers, employees
physical capital
all manufactured resources
machines, buildings, mechanical equipment
human capital
training, skills, education
entrepreneurship
person who organizes, manages, and assembles the other resources, virtually no new business could get started or operate without entrepreneurs
-risk taskers as they can lose a lot
- maker of basic business decisions
economic system
a scoiety’s institutional mechanism for determining the way in which scare resources are used to satisfy human wants
-each country must figure out how to deal with scarcity and allocation issues
3 questions each economy must answer
- what goods and services will be produced
-what do people want?
-consider opportunity costs - how will goods and services be produced
-labor? machines? - who will receive the goods and services produced
-government or market distribution
market economy
market forces (supply & demand) answer 3 questions
very decentralized
institutions created by the state protect private property & enforce contracts
adam smith’s “invisible hand”
when everyone does what’s in their own best interest, the economy thrives
centrally planned economy
central government makes all output, pricing, and allocation decisions
why does centrally planned economy fail
individuals likely don’t have proper incentives to work hard, innovate, or maintain resources
government isn’t very good (compared to markets) or determining needs of individuals
mixed economy
most economic decisions may result from the interaction of buyers and sellers in markets but the government plays a role in the allocation of certain resources
-all economies are mixed to some degree
-depends on the extent of government role
3 questions create what 3 sub questions
who owns the factors of production (inputs)?
can individuals own private property?
how involved is the government in the production and distribution process?
these sub questions ultimately
determine the incentives that people face
incentives affect
individual decision making
the actions of individuals will
aggregate & affect overall economic growth, income, and well being
the wrong incentives will
slow or stop government growth & innovation
communism
most or all property and resources are collectively owned and distributed by the government. idea in which all people are equal and there is no need for money or the accumulation of individual wealth
3 points of communism
- no private ownership of economic resources
- central government controls all facets of production
- economic output is owned and distributed by government
central government provides people with all living necessities from benefits of
collective labor (depends on constant advances in technology to provide increased production
problem with “from each according to his ability, to each according to his needs”
the government
- expects you to contribute as much as they ask
-determine your “needs”
communism ideology birthed because of french revolution because Karl Marx believed
all of history was based in class struggles
in a capitalist society, Marx saw a “ruling class” that
owned the means of production
the “working class” either were the means of production, or
enabled other means of production, such as operating machinery
Marx believed resentment would arise under capitalism
he actively advocated for such working class revolts
communism philosophy
from each according to his ability, to each according to his needs
communism economy planned by
central government
communism ownership of economic resources
all resources are publicly owned and controlled by the government
communism distribution of economic production
production will meet all basic human needs and is distributed to the people at no change
communism class distinction
class is abolished
communist states
north korea, cuba, former soviet union
why is china not pure communism?
- economy not communist anymore (state is partially communist on paper)
- series of market-oriented economic reforms starting in 1978 after death of Mao Zedong
-decollectivization
-permission for entrepreneurs to start business
-privatization of many state-owned industries
-special economic zones
Marxism
is a political and economic philosophy
one necessary facet to the transformation towards a communist society is
abolishment of inheritance
why is it bad to be equal with communism
we will all be equally poor
main economic problems with communism
- strong incentive to free ride
- economy will stall out
communism today
- rise in the “oppressed vs oppressor” ideology
- many people today more concerned with equity of results rather than equity of opportunity
china communism
agricultural output from 1970s was less than output in 1949
chinese farmers 1978
wanted to grow food for themselves rather than being dependent on government
result: increase in per capita income
why did things change after farmers asked to grow food?
they had incentives to produce all because they changed economic rules
with government having control over everything
extreme corruption
human rights violations
leaders are rich
citizens are poor, fearful, powerless
example of affects of communism
north vs south korea
USSR communism 1950-1980
large investments in physical capital (factories)
resulted in increases in capital per hour worked and GDP per hour worked
why lack of technological advances in USSR?
no incentives to work or innovate in a way that supports long run growth
collapsed in 1991
life for a typical person in USSR
long lines, shortages, and unhappy people
socialism
an economic system under which each person- though a democratically elected government- is given an equal share of economic inputs: labor, land, entrepreneurship, capital goods, and natural resources
pure socialism assumes that people
naturally want to cooperate, but are restrained from doing so by competition inside of capitalism
like a command economy, the socialist government employs
centralized planning to allocate resources based on both the needs of individuals and society as a whole
socialism phrase
“from each according to his ability, to each according to his contribution
problem similar to that of communism:
government determines ability and contribution and wrong incentives lead to slow or no growth
communism and socialism both formed out of
perceived exploitation of workers by wealthy business during revolution
ex. french revolution, industrial revolution
communism and socialism both assume that goods and services will be produced and distributed by
government- controlled institutions or collective organizations
central government is responsible for
all aspects of economic planning, including matters of supply and demand
socialism is based on the premise the people will compensated based in
their level of individual contribution to the economy
-possible for effort and innovation to be rewarded under socialism
- but still massive government control
socialism ownership
individuals can own private property
socialism class distinction
classes exist but difference are diminished. it is possible for some people to earn more than others
socialism countries
algeria, bangladesh, eritrea, guinea-bissau, guyana, nepal, nicaragua, portugal, sri lanka, tanzania, western sahara
countries with policies could be described as more social
france, germany, norway, denmark, finland, sweden
all goods in the european countries are still distributed by
free markets with a captistlic approach
you could loosely defined some of them as leaning more toward a
social democracy
democratic socialism
an economic, social, and political ideology holding that while both the society and economy should be run democratically, they should be dedicated to meeting
- the needs of the people as a whole (rather than encouraging individual prosperity)
Goal of democratic socialism
eventually have universally-used services distributed by government (housing, utilities, mass transit, health care)
consumer goods are distributed by a capitalistic free market
the second half of the 20th century saw the birth of a more moderate version of socialist democracy, calling for
mixture of socialist and capitalist control of all means of economic production
extensities social welfare programs to help provide basic needs of the people
how are social welfare programs funded
various taxes
notable about scandinavian taxes
top taxes rates in scandinavia hit middle class people, not just the rich
VAT
valued-added tax
added to each good through different production stages
why is a VAT regressive
lower income people send a higher percentage of their income on this tax than higher-income people
