Economic Systems & Decision Making

Chapter Two

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 • North Korea, former Soviet Union,

Cuba

Command Economy: 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

• 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… • Must be competitive • Resources must be mobile • Consumers need access to adequate information • **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 layoffs and illness • Full Employment: The economic system will provide as many jobs as possible • Price Stability: Stable prices

Economic and Social

shelter;

Goals

• Control Inflation: Rise in general level of prices-workers need more $$ to pay for food, clothing,

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

Capitalism 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  welfare • Local governments  production, 2 nd education & public libraries, parks, etc • Government consumes factors of 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