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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.