Transcript Economic Objectives and Economic Systems

Economic Objectives and
Economic Systems
AS Economics
Aims and Objectives
Aim
 Understand economic objectives and economic
systems.
Objectives
 Define different agents’ objectives in an economy.
 Describe how these objective are competing.
 Analyse different types of economic systems.
Economic Objectives
Economic Objectives
1. Consumers
2. Workers
3. Firms
4.
Governments
List the things
List the
List the
List the
you want from
things you
things you
things you
an economy,
want from an want from an and things you want from an
economy,
need from an economy and
economy,
the things
and things
and things economy. You
you needs
may wish to
you need
you need
from an
consider
from an
from an
economy.
profits,
economy.
economy.
investments.
E.g. Taxes
Consumers
Workers
• Maximise
economic
welfare.
• Range of
choice of
products and
services
• Competitive
environment
• Maximise
gains from
working. I.e.
wages
• Benefits such
as company
cars
• Good
working
conditions.
• Maximise
economic
welfare.
Firms
• Maximise
profits.
• Maximise
returns on
investment.
Governments
• Objectives
not always
shared with
all economic
agents.
• Political
objectives
influence
decisions.
• Allocate
resources
efficiently.
New High Speed Train Line
 A new high speed train
line is planned to be built
from Leeds to London.
 It would mean the
creation of a new line and
state of the art station
which would include a
 In groups of economic agents,
new shopping centre.
form an argument considering
However it would result in
your objectives, as to whether
the demolition of the
or not this should go ahead.
villages of Barton Le Clay  Consider residents of the areas
and Toddington.
opinions.
Conflicts Between Agents
 Economic agents often have different, conflicting opinions and
objectives.
 Decisions about the allocation of resources will need to take
into account these objectives and conflicts.
 Whether the government intervenes to allocate resources
depends on the economic system.
Berlin Wall
1989 Signalled the end of Communism
Command/Planned Economy
 Resources are allocated by the command
mechanism (i.e. the government).
 All decisions about what and how much and
who should produce goods/services are taken
by government.
 Only exist in a dictatorship government.
 Consumers had to queue to buy goods, whose
prices were fixed by governments, resulting in
shortages and poor quality goods.
 Command economies broke down.
 Still exist: China, North Korea, Cuba.
Market Economy
 Resources are allocated by the price mechanism
and market forces.
 Allocates scarce resources among competing
uses.
 Market could be anything from a street market,
to buying goods and services online, to markets
such as eBay!
 One example would be labour, exchanged for
cash, as different prices.
Prices andPrices
Profits inand
Free Market
Profits
Economy
Scarce resources achieve high prices.
E.g. Diamonds
Prices and profits have three key
functions:
1. Incentive function
2. Rationing function
3. Signalling function
Prices and Profits in Free Market
Economyand Profits
Prices
When prices rise:
 Consumers tend to ration their
demand.
 Sends a signal to producers that
there is a scarcity or shortage.
 Creates an incentive for suppliers
to increase supply as more profit is
potentially available.
Prices and Profits in Free Market
Economyand Profits
Prices
When prices fall:
 Consumers increase their
demand, end to rationing.
 A signal is sent to producers that
there is too much supply and
scarcity falls.
 Creates an incentive for producers
who see profits falling to leave the
market.
 As oil prices increase, motorists would spend more money on petrol
and be tempted to ration the amount of journeys, cutting demand for
petrol.
 Oil companies are incentivised to increase supply by developing oil
fields.
 High market price has signalled new firms should enter the markets.
100
US('90)/bbl
80
60
40
20
0
1970
1980
1990
2000
2010
2020
Cuban Economy, changing for the
better?
Talking Points
 What were the problems being experienced in
Cuba’s command economy?
 Why might small changes be happening to Cuba’s
economy?
 What may be the benefits and drawbacks of Cuba
changing from a command to a market economy?