Download Ch. 2: Economic Systems and Decision Making

Ch. 2: Economic Systems and
Decision Making
Traditional Economies
• Allocation of scarce resources stems from
ritual, habit, or customs
– Dictate most social behaviors
• Defined by customs of elders/ancestors
• Ex?
• African tribes, Aborigines, Inuit
Traditional Economies
• Advantages
• Everyone knows the
role to play
• Life is stable,
predictable,
continuous
• Disadvantages
• Discourage new ideas
• Lack of progress =
lower standard of
living
Command Economies
• Central authority makes the what, how,
and for whom decisions
• People have very little, if any, influence
• Ex?
• North Korea, China, former Soviet Union,
Cuba
Command Economy:
Advantages
• Advantages
• Change direction drastically in a short
amount of time
• Little uncertainty: People do not have to
worry about what to study, where they
will work, or if they’ll lose jobs
Command Economy:
Disadvantages
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Disadvantages
Does not meet the wants of the consumer
No incentive to work hard
Requires a large bureaucracy
No flexibility to deal with minor problems
Innovation is difficult to express
Market Economies
• People and firms decide act in their own
best interests to answer the what, how,
and for whom
• The “market” is where buyers and sellers
come together to exchange goods and
services
• Ex: United States, Canada, Great Britain,
Europe, South Korea, Japan, Singapore
Market Economy: Advantages
• Over time, market adjusts to change
• Allows for a high degree of individual
freedom
• Relatively small degree of govt.
interference
• Decision-making is decentralized
• Incredible variety of goods and services
• High degree of consumer satisfaction
Market Economy: Disadvantages
• Does not provide for the basic needs of
everyone in the society (some members
are too old, young, or sick to care for
themselves)
• Does not provide enough of the services
that are highly valued
• High degree of uncertainty that workers
and businesses face as a result of change
Disadvantages, continued
• Market economies fail if 3 conditions are not
met…
• Markets must be reasonably competitive;
• Resources must be reasonably free to move
from one activity to another;
• Consumers need access to adequate
information so that they may weigh the
alternatives and make wise choices
**When markets fail, some businesses become too
powerful and some individuals receive incomes larger
than that justified by their productivity
Section 2: Evaluating
Economic Performance
Economic and Social Goals
• Economic Freedom: Freedom to make
their own decisions, occupations,
employers, goods and services
• Economic Efficiency: Resources are
scarce and must be used wisely.
Economic decisions must be efficient so
that benefits gained are greater than the
costs
Economic and Social Goals
• Economic Security:
We desire protection
from layoffs and
illness
• Congress established
Social Security which
provides disability and
retirement benefits for
virtually all working
people
• Full Employment:
The economic system
will provide as many
jobs as possible
Economic and Social Goals
• Price Stability: Stable
prices
• Inflation: Rise in general
level of prices-workers
need more $$ to pay for
food, clothing, shelter;
• Fixed Income: An
income that does not
increase even though
prices go up
Economic and Social Goals
• Economic Growth:
People want a better
life; as population
grows, so must the
economy to continue
to meet everyone’s
needs
• Future Goals: New
goals may be added,
such as a cleaner
environment, etc…
Trade-Offs Among Goals
Some people may oppose certain goals
because they believe it may hurt the
economy, where others believe it would
help the economy… Such as?
Section 3: Capitalism and
Economic Freedom
A market economy is based on
CAPITALISM, where private citizens own
the factors of production.
FREE ENTERPRISE is another term used
to describe the American economy.
In a free enterprise economy, competition
is allowed to flourish with a minimum of
government interference
Competition and Free Enterprise
• A free enterprise economy has 5 important
characteristics:
• Economic freedom
• Voluntary exchange
• Private property rights
• Profit motive
• Competition
Economic Freedom
• People have the
right to choose:
• Occupation
• Employer
• Self-Employed
Voluntary Exchange
• Buyers and sellers are
free and willing to
engage in market
transactions
• Both parties obtain
something they believe
has more has more
value than the money or
products they gave up
Private Property Rights
• Privilege that entitles people to own and
control their own possessions as they wish
• Private property gives people the
incentive to work, save, invest, and be
successful
Profit Motive
• People are free to risk their savings or any
part of their wealth in a business venture
• Profit is the extent to which persons or
organizations are better off at the end of a
period than they were at the beginning
• Total revenue – Total Costs = PROFIT
• The driving force that encourages
people/organizations to improve their
material well being
Competition
• The struggle among
sellers to attract
customers while lowering
costs
• The result: goods and
services are produced at
the lowest cost and are
allocated to those who
are willing and able to
pay for them
The Role of the Entrepreneur
• Organize and manage land, labor, and
capital in order to seek profit
• Want to be their own boss and are willing
to risk everything to make their dreams
come true…
• Many fail
The Role of the Consumer
• In the U.S., the consumer has power
because they determine which products
are ultimately produced.
• Consumer Sovereignty: The ruler of the
market
• “The customer is always right”
• The $$ they spend are their “votes” to
select the most popular products
The Role of Government
• Acts as “Protector”
• Protects property rights, enforces
contracts, tries to make sure everyone
follows the “rules of the game” to ensure
an efficient and fair economy
Provider and Consumer
• All levels of government provide goods
and services for its citizens:
• National government  defense services
• State government  education & public
welfare
• Local governments  libraries, parks, etc
• Government consumes factors of
production, 2nd largest consumer
Regulator
• National government is charged with
preserving competition in the marketplace
• Very controversial. Why?
• Most companies do not want to be told
how to run their affairs
Promoter of National Goals
• Government reflects the will of a majority
of its people
• Must modify the economic system to
achieve economic goals of freedom, price
stability, equity, security, full
employment, and economic growth
• What has occurred in the last two years
and how has the government reacted?
Promoter of National Goals
• The United States is said to have a Mixed
Economy or a Modified Private
Enterprise Economy