Transcript Document 7729229

How Decisions are Made
Using an Economic System
Method of organizing the
relationship between businesses,
households and the government
to make the production decisions
4 Types
1. Agrarian or Traditional
- Follow in family business
- Usually smaller groups
- Few true examples
A. What?
What the family business has been
producing (for generations)
1. Agrarian or Traditional
B. How?
Using the same method that have
been used (for generations)
No incentive for change
1. Agrarian or Traditional
C. For Whom?
Determined by place in society.
1. Agrarian or Traditional
Strengths
-Economic security
-Strong family/community ties
1. Agrarian or Traditional
Weaknesses
-Resistant to change
-Few economic incentives/freedom
-Limited goods and services available
-Keeps social order
2. Market Economies
- Based on price system
- Interaction of buyers and sellers
- Involves private property rights
A. What?
- Goods and services that are profitable
- Goods and services consumers want.
2. Market Economies
B. How?
Efficiently- least cost combination of
resources
2. Market Economies
C. For Whom?
Those who can pay.
2. Market Economies
Strengths
-Efficient production
-Prices coordinate production
-Provides a wide variety of goods
-Able to adjust for changing demand
2. Market Economies
Weaknesses
-Not always socially desirable goods
-No economic security
-Imperfect knowledge about goods
that are available
3. Planned Economies
- Government owns resources
- Government make production
decisions
A. What?
-Goods needed to meet economic
planning targets
3. Planned Economies
B. How?
Aimed at achieving targets
Switch resources around to meet
targets
3. Planned Economies
C. For Whom?
Government decides who gets goods
Bonuses for important workers
3. Planned Economies
Strengths
-Can achieve social goals
-Can eliminate unemployed resources
-More equitable distribution of goods
-More easily able to adjust resources
3. Planned Economies
Weaknesses
-Over or underproduction
-Few incentives for workers
-Few choices for consumers
-Increasingly complex process
4. Mixed Economies
- Combine aspects of market and
planned economies
- Includes almost all economies
4. Mixed Economies
Resource Ownership
Coordinating Mechanism
Market System
Private
US
Public
China
Planning
Nazi
Germany
Cuba
1. Businesses are free to produce what
ever they want and are always looking for
cost-cutting techniques of production.
Traditional? Market? Planned? Mixed?
Market
Market
Market
2. A catering business goes bankrupt,
but its employees receive unemployment
compensation while they look for other
jobs.
Market?
Mixed Planned?
Traditional?
Mixed
Mixed
Mixed?
3. Union and management
representatives submit a deadlocked
labor contract negotiation to the
government for mediation.
Traditional?
Mixed
Mixed
Mixed
Market? Planned?
Mixed?
4. Workers who have lost their jobs and
incomes cut back their spending because
there is no alternative source of
emergency financial support once their
savings runs out.
Market
Mixed? Market
Market?
Traditional?
Planned?
Market
5. Consumers are unable to obtain fuel
injectors and windshield wiper motors
for their cars because they are not being
produced, yet accordions, which are
plentiful and not in demand, continue to
be produced.
Planned
Planned
Planned?
Planned
Traditional?
Market?
Mixed?
Factor Markets
Businesses
Households
Product Markets
Which
one?
a. A real flow through a product market?
b. A money flow through a product market?
c. A real flow through a resource market?
d. A money flow through a resource market?
1. Receiving a paycheck at the end of each month?
2. Delivering a specially ordered car to a buyer?
3. Receiving patient care in a hospital?
4. Using a credit card to buy a meal in a restaurant?
5. Earning profit at your summer ice cream stand?
6. Obtaining college credits?
7. Working overtime?
a
d
b
c
Factor Markets
Product Markets
Income
Taxes
Goods and
Services
Payments
Goods and
Services
Payments
and Legal
Businesses
Goods and
Services
Resources
Business
Taxes
Resources
Payments $$
Households
The Circular Flow Diagram
• Four key markets coordinate the
circular flow of income.
•1. the resource market coordinates
demand for factors of production
between businesses and households.
2. The goods & services market
coordinates the demand for output
between businesses and households.
3. The loanable funds market
directs household and foreign
investments to business and
government borrowers .
4. The foreign exchange market
coordinates demand for currencies
for export/import transactions
Another
Circular
Flow
Government Involvement
in the Circular Flow
With Households:
It Provides:
Legal Framework
Infrastructure
Security
It Gets:
Taxes
Government Involvement
in the Circular Flow
With Businesses:
It Provides:
Legal Framework
Infrastructure
Security
It Gets:
Taxes
Government Involvement
in the Circular Flow
With Factor Markets:
It Provides:
Legal Framework
Infrastructure
Security
Factor Payments
It Gets:
Factors of Production
Government Involvement
in the Circular Flow
With Product Markets:
It Provides:
Legal Framework
Infrastructure
Revenue Payments
It Gets:
Goods and Services
Market prices direct
individuals pursuing
their own interests to
produce good that
will benefit society
1. Adam Smith’s The Wealth of Nations
(new theory) The best way to increase the wealth of a country
is through individual decision making with minimal government
influence.
Laissez faire
(old theory) Mercantilism
– government formed economic policy.
-It granted charters for colonies to produce certain goods
(new)
2. Industrial Revolution
a. Inventions made large-scale production possible.
+ mass production, factory system
- long hours, poor working conditions
b. Creates a need for inputs and a need for markets
3. US Development
a. Growth in transportation and communications
opened new markets
b. Electricity and oil allowed for mass production
c. New goods were invented
-typewriters, light bulbs, automobile, new farm machinery
d. Problems developed
1. Large businesses became monopolies and trusts
2. Living conditions became harsh
- long hours, low wages, slums, child labor
3. Government Response
a. Anti-trust legislation
- FTC, Food and Drug Act, Sherman Anti-Trust
Act
b. Movement away from laissez faire
4. The Great Depression
a. Problems of the 20’s.
-
production for WWI not needed any longer
tariffs eliminated markets
farmers were overproducing
unemployment rising
inside of the Production Possibilities Curve
b. Creates a need for inputs and a need for markets
b. The government took action
- farmers paid not to grow
- government work projects set up
- Social Security created
- FDIC
- Employment Act of 1946
Government required to take action:
- full employment
- full production
- stable prices
c. Recent Trends
- Reagan and Carter - deregulation
- Reagan and Bushes – large deficits
- Clinton – balance budget, sex
- George W. – tax cuts, large deficits
True or False?
1.
Highly-developed economies must make the basic
economic choices, whereas less-developed economies produce
so little that no choices are possible.
2.
Price is the language through which buyers and sellers
communicate their intentions to one another in a pure market
economy.
3.
Households buy goods and services in output markets and
sell factors of production in input markets.
4.
The least-cost method of production is the method that
uses resources most efficiently.
5.
The value judgments of persons running households and
businesses play virtually no role in economic decision making in a
pure market economy.
6.
In a planned economy, economic decisions are made by
individual buyers and sellers.
7.
A lack of incentives to protect the environment is a
weakness of both market economies and planned economies.
8.
In a socialist economy, goods and services go only to those
who can pay for them with money earned from resources they
own.
9. A socialist system favors collective ownership of society's
factors of production.
10. There is no difference between a market economy and a
planned economy in how income is distributed
11.
Scarcity is a problem in a market economy but not a
planned economy.
12.The invisible hand doctrine was Adam Smith's idea that
allowing competing sellers to act in their own best interests
advances the economic interests of all society.
13.The Sherman and Clayton Acts were passed to help maintain
U.S. laborers’ living and working conditions.
14.The Employment Act of 1946 gave the federal government the
right and responsibility to provide an environment for the
achievement of full employment, full production, and price
stability.
15.
Over the years, government's intervention in the economy
has increased, but the increase has not been smooth or
continuous.