Download Unit 2 Economic Systems

Unit 2 Economic Systems
•Different methods can be used to allocate
goods and services. People, acting individually
or collectively through government, must choose
which methods to use to allocate different kinds
of goods and services.
•People respond predictably to positive and
negative incentives.
Economic systems
• Economic system is organization of how a
society uses it’s scarce resources to
satisfy its unlimited wants
– Framework of laws, rules written & unwritten
which provide incentives & influence behavior
– “Rules to the game of life” not the board
game
Economic Systems
Who answers
the basic
Traditional
econ ?’s
Command
Market
What to
produce?
Decisions by
customs & past
actions
Decisions by
government &
central planners
Decisions by
individuals &
businesses
How to
produce?
Decisions by
customs & past
actions
Decisions by
government &
central planners
Decisions by
individuals &
businesses
Who gets
what?
Decisions by
customs & past
actions
Decisions by
government &
central planners
Decisions by
individuals &
businesses
Comparison of
Economic
Systems
Economic decisions
made by:
Traditional
Command
Market
Customs, past actions
Government & Central
Planners
Businesses &
Individuals
Supply & Demand
Ownership:
Community owned
Public ownership ~
society
Private owner ~
individual
Incentive for
success/Behavior
Reward staying in
society/survival
Bhv: Repeat past
actions
Reward better job,
housing, power elite
Bhv: Do what your
told
Hand tools; No
technology
Human & animal
power
No machines
Technology used
Tractors & gas/oil
power
Machines
Technology used
Tractors & gas/oil
power
Machines
Prioritize projects
Zero unemployment
Strong motivation for
work
Efficient use of resources
Lots of economic
freedom  Consumers
Role of technology
Farming methods
Advantages

Disadvantages

Examples
Strong sense of
community
Everyone is “valued”
Little stress about
future
Inefficient production
Survival mode
Little leisure time
Amish community
Ant colony in Bug’s Life
“Free” day care, educ,
housing
Relative equality
Little
flexibility/individuality
Large bureaucracy
Lack of effective
incentives
 Consumers
Former USSR
Cuba
North Korea
Reward $$$$
Bhv: Wise choices
Uneven distribution of
wealth/income ~ poverty
Market failures
Uncertainty; business
cycle
United States
Japan
Germany
Economic Goals
• economic freedom ~ right to accept/reject a job
open/close a business
• economic equity (justice) ~ relatively equal distribution of
wealth, small gap between rich & poor
• economic stability ~ prices relatively constant, no inflation,
no recession, depression
• economic efficiency ~ best use of resources, increase profit
by making products cheaper
• economic security ~ safety net for those unable to work,
elderly, unemployed
• economic growth ~ increase standard of living by making
more stuff, increasing GDP
All nations are mixed economic systems.
Command
Market
Economic Spectrum
Each nation is unique mixture of command & market elements.
Broad Social Goals in Command and Market
Economies
Broad Social Goals
In Command Economies
In Market Economies
Economic efficiency
Resource allocation
established by central
planners. State-owned
businesses are often in
efficient but rarely allowed to
fail
Most allocation decisions
made by consumers and
producers in markets.
Extensive specialization and
international trade increase
productivity and competition.
Economic Equity
Wages often set by
Equality of opportunity, people
government to provide greater are free to make own decisions
equality of income.
on how to use their resources
Opportunities for moving or
and capabilities but no
changing jobs are limited, so
guarantee of success. Income
jobs may not make use of
depends on the value of labor
individuals’ skills and abilities.
and other resources and
individual has to sell.
Broad Social Goals in Command and Market
Economies
Economic freedom
Government ownership of
most capital and land
resources, many decisions
made by central planners.
Private ownership of all
kinds of resources is
allowed, and individual
freedom and control of
resources is highly valued.
Economic Growth
Growth targets set by central
planners who assign output
quotas for different firms.
Weak incentives to reduce
waste. Plant facilities and
equipment maintenance
often a problem.
Incentives for individuals
and businesses to produce
more and avoid waste
encourage efficient use of
resources. Specialization,
investment in capital and
workers’ education and
training, and trade encourage
higher levels of output.
Broad Social Goals in Command and Market
Economies
Economic Security
Pensions, jobs, income,
housing, and health care
provided or guaranteed by the
government.
Generally, individuals are
responsible for their own health
care, retirement benefits, housing,
and income. But there are some
government programs to reduce
risks and provide increased
economic security such as
assistance for low-income families,
unemployment compensation,
social security, and government job
training programs.
Economic Stability
No unemployment, prices
usually set below price to
ensure that goods are sold,
which controls official
measures of inflation.
Some unemployment is
tolerated, income depends on the
resources and individual has to
sell, the federal government uses
monetary and fiscal policies to
reduce unemployment and
inflation and encourage
economic growth.
Unit 2 Review
economic system
traditional
economic system
command
economic system
market economic
system
mixed economic
system
dynamic
economic
spectrum
Organization of how a society uses it’s scarce resources to
satisfy it’s unlimited wants. (Framework of laws written
and unwritten)
3 basic economic questions answered by actions of past
generations or customs.
3 basic economic questions answered by decisions of
government or central planners.
3 basic economic questions answered by decisions of
individuals or businesses.
3 basic economic questions answered through a
combination of command, market, and traditional
decisions. All nations are mixed economies.
Constantly changing, shifting, moving. Economic
systems are dynamic because of world events, change in
government leaders, society’s values, or technology
Economic decision-making is a range between command
and market systems. Each nation is a unique
combination of command & market systems.
Unit 2 Review
standard of living
The quantity and quality of goods and services available
to an individual or society.
nationalized or
nationalization
The transformation of privately owned business into
public ownership.
privatized or
privatization
The transformation of publicly owned business into a
privately owned one.
Economic system in which the means of production are
owned by the government and resources are distributed
thru central planning. Command economic system
An economic system in which the means of production
are owned by individuals and businesses and resources
are privately owned. Market economic system
Ability of an individual to own and exercise control over
scarce resources.
socialism
capitalism
private property
Unit 2 Review
eminent domain
The right of government to acquire private property for
public use by paying fair market value.
consumer
sovereignty
The freedom of buyers to choose which goods and
services to buy.
profit motive
The desire of businesses to earn greatest amount of
money. Incentive for business
free enterprise
The freedom of business to make decisions to earn
maximum dollars.
competition
The rivalry among businesses for consumer dollars.
Unit 2 Review
economic goals
Desirable economic targets for policymakers which will
benefit society.
economic freedom
Open/close business, pick job, spend or save $
Wise choices of businesses & individuals.
economic efficiency
Wise use of resources, no idle resources or waste.
Maximum production of resources.
economic equity
Distribution of income/wealth. Poverty and gap between
the rich and poor.
economic growth
The increase in production of goods and services over time;
Measured by GDP or GDP/capita. Increased economic growth
leads to an increasing standard of living.
economic stability
Stable prices (low inflation) and full employment (low
unemployment)
economic security
Financial safety net for young, old, disabled,
unemployed, and sick.