Economic Systems and

Decision Making

Economic Systems and

Decision Making

Objective Objective

• Understand the different major economic systems.

• Understand the different major economic systems.

Economic SystemEconomic System

• Method used by a society to produce and distribute goods and services

• Answers the question What, How, and For Whom to Produce

• Method used by a society to produce and distribute goods and services

• Answers the question What, How, and For Whom to Produce

Traditional EconomyTraditional Economy

• The allocation of scarce resources stems from ritual, habit, or custom.

• What: Same goods and services produced by previous generations

• How: Same as past generations• For Whom: Traded locally for other

finished goods and services

• The allocation of scarce resources stems from ritual, habit, or custom.

• What: Same goods and services produced by previous generations

• How: Same as past generations• For Whom: Traded locally for other

finished goods and services

Traditional EconomyTraditional Economy

• Advantages: Everyone knows what role to play.

• Disadvantages: Discourages new ideas and ways of doing things- Punishes those who are different- Lack of progress which leads to

a lower standard of living

• Advantages: Everyone knows what role to play.

• Disadvantages: Discourages new ideas and ways of doing things- Punishes those who are different- Lack of progress which leads to

a lower standard of living

Command EconomyCommand Economy• The government makes all the

decisions regarding What, How, and For Whom

• What: Government decides which goods and services are produced

• How: Government decides how resources will be used to produce

• For Whom: Government decides who receives the goods and services

• The government makes all the decisions regarding What, How, and For Whom

• What: Government decides which goods and services are produced

• How: Government decides how resources will be used to produce

• For Whom: Government decides who receives the goods and services

Command EconomyCommand Economy

• Advantages: • Can change direction drastically in

a short period of time.- People don’t have to worry about what they will study, where they will work, or if they might lose their job because the decisions are made for them.

• Advantages: • Can change direction drastically in

a short period of time.- People don’t have to worry about what they will study, where they will work, or if they might lose their job because the decisions are made for them.

Command EconomyCommand Economy

• Disadvantages: – Although most basic needs are provided for,

it is not designed to meet the wants of consumers.

– Does not motivate people to work hard because salaries are the same

– People with new or unique ideas find it difficult to get ahead because rewards for individual initiative are rare

• Disadvantages: – Although most basic needs are provided for,

it is not designed to meet the wants of consumers.

– Does not motivate people to work hard because salaries are the same

– People with new or unique ideas find it difficult to get ahead because rewards for individual initiative are rare

Market EconomyMarket Economy• What: Firms produce goods and services

that consumers are willing and able to buy for prices that will yield profits

• How: Business owners decide which factors of production they will use to produce goods and services

• For Whom: Finished goods and services are distributed to those who are willing and able to buy them (Think of your dollars as “votes”)

• What: Firms produce goods and services that consumers are willing and able to buy for prices that will yield profits

• How: Business owners decide which factors of production they will use to produce goods and services

• For Whom: Finished goods and services are distributed to those who are willing and able to buy them (Think of your dollars as “votes”)

Market EconomyMarket Economy

• Advantages:– Change is encouraged– Individual freedom - producers can

make what they want and consumers can buy what they want

– Government stays out of the way– Variety of goods and services– Consumer satisfaction

• Advantages:– Change is encouraged– Individual freedom - producers can

make what they want and consumers can buy what they want

– Government stays out of the way– Variety of goods and services– Consumer satisfaction

Market EconomyMarket Economy

• Disadvantages: – Does not provide for basic needs of

everyone – Does not provide enough of the

services people value such as national defense, education, or health care because companies focus on what products they can sell

– High level of uncertainty

• Disadvantages: – Does not provide for basic needs of

everyone – Does not provide enough of the

services people value such as national defense, education, or health care because companies focus on what products they can sell

– High level of uncertainty

The U.S. has a “mixed economy”

The U.S. has a “mixed economy”

• We have a “mixed economy” because although we carry on our economic affairs freely, we are subject to some government intervention and regulation

• We have a “mixed economy” because although we carry on our economic affairs freely, we are subject to some government intervention and regulation

Mixed EconomyMixed Economy

• Advantages: Provides assistance for some people who might otherwise be left out

• Services like national defense cannot be provided by private sector

• Disadvantages: More services means higher costs for citizens overall

• Advantages: Provides assistance for some people who might otherwise be left out

• Services like national defense cannot be provided by private sector

• Disadvantages: More services means higher costs for citizens overall

• Is a mixed economy more desirable than the other economic systems? Why or why not?

• Is a mixed economy more desirable than the other economic systems? Why or why not?

Describe the difference in how a command economy and a market economy would respond

to the following scenarios

Describe the difference in how a command economy and a market economy would respond

to the following scenarios

• 1. A new strain of low-cholesterol corn is developed.

• 2. There is an excess supply of steel.• 3. The cost of milk has sharply

increased.• 4. A shortage of nurses has occurred.• 5. Denim coats are the new fad.

• 1. A new strain of low-cholesterol corn is developed.

• 2. There is an excess supply of steel.• 3. The cost of milk has sharply

increased.• 4. A shortage of nurses has occurred.• 5. Denim coats are the new fad.

CapitalismCapitalism• Private ownership of industry (you

started with your own candy)• Freedom of competition (rock,

paper, scissors)• Unequal economic classes (some

of you won, some of you lost)

• Private ownership of industry (you started with your own candy)

• Freedom of competition (rock, paper, scissors)

• Unequal economic classes (some of you won, some of you lost)

SocialismSocialism• Government ownership of industry

(I collected the candy)• Goal is to bring economic equality

(I redistributed candy equally)• Aims for a classless society

(everyone now has the same amount of candy)

• Government ownership of industry (I collected the candy)

• Goal is to bring economic equality (I redistributed candy equally)

• Aims for a classless society (everyone now has the same amount of candy)

CapitalismCapitalism• A market economy is normally

based on capitalism• Where private citizens, many of

whom are entrepreneurs, own the factors of production

• A market economy is normally based on capitalism

• Where private citizens, many of whom are entrepreneurs, own the factors of production

Free EnterpriseFree Enterprise

• Competition is allowed to thrive with a minimum amount of government interference

• Used to describe the American economy

• Competition is allowed to thrive with a minimum amount of government interference

• Used to describe the American economy

Capitalism and Free Enterprise

Capitalism and Free Enterprise

• Capitalism and free enterprise are often used interchangeably, although meanings are different

• Capitalism stands for private ownership of resources

• Free enterprise is the unhindered use of privately owned resources to earn profits.

• Capitalism and free enterprise are often used interchangeably, although meanings are different

• Capitalism stands for private ownership of resources

• Free enterprise is the unhindered use of privately owned resources to earn profits.

Five Characteristics of Free Enterprise

Five Characteristics of Free Enterprise

1. Economic Freedom- People can work where

and when they want- Businesses can make

what they want and set the prices they want

1. Economic Freedom- People can work where

and when they want- Businesses can make

what they want and set the prices they want

Five Characteristics of Free Enterprise

Five Characteristics of Free Enterprise

2. Voluntary Exchange- Act of buyers and sellers freely and willingly participating in market transactions- Both are better off after the exchange has occurred because both the buyer and seller believed there was more value in what they received then what they gave up

2. Voluntary Exchange- Act of buyers and sellers freely and willingly participating in market transactions- Both are better off after the exchange has occurred because both the buyer and seller believed there was more value in what they received then what they gave up

Five Characteristics of Free Enterprise

Five Characteristics of Free Enterprise

3. Private Property Rights- Privilege that allows people to own and control their possessions as they wish- Motivates people to be successful because they can keep any rewards they earn

3. Private Property Rights- Privilege that allows people to own and control their possessions as they wish- Motivates people to be successful because they can keep any rewards they earn

Five Characteristics of Free Enterprise

Five Characteristics of Free Enterprise

4. Profit Motive- Driving force that encourages people and organizations to improve their material well-being- Profit is when people or organizations feel they are better off at the end of an exchange

4. Profit Motive- Driving force that encourages people and organizations to improve their material well-being- Profit is when people or organizations feel they are better off at the end of an exchange

Five Characteristics of Free Enterprise

Five Characteristics of Free Enterprise

5. Competition- Struggle among sellers to attract consumers while lowering costs - Consumers compete to find the best products at the lowest prices

5. Competition- Struggle among sellers to attract consumers while lowering costs - Consumers compete to find the best products at the lowest prices

The Role of the Entrepreneur

The Role of the Entrepreneur

• Organizes the factors of production in order to profit

• When an entrepreneur is successful, everyone benefits

• Organizes the factors of production in order to profit

• When an entrepreneur is successful, everyone benefits

The Role of the ConsumerThe Role of the Consumer

• Consumer Sovereignty - ruler of the market because if the consumer likes the product, it will sell and the producer will benefit, but if the consumer does not like the product, they will refuse to purchase and the firm may go out of business

• Dollars spent are “votes”

• Consumer Sovereignty - ruler of the market because if the consumer likes the product, it will sell and the producer will benefit, but if the consumer does not like the product, they will refuse to purchase and the firm may go out of business

• Dollars spent are “votes”

The Role of the Government

The Role of the Government

• Protector - laws against false advertising, unsafe food and drugs, discrimination

• Provider and Consumer - provides parks, libraries, bus service and in the process they have to make purchases to run these services

• Regulator - oversees banking, regulates insurance rates and automobile registrations, building permits

• Protector - laws against false advertising, unsafe food and drugs, discrimination

• Provider and Consumer - provides parks, libraries, bus service and in the process they have to make purchases to run these services

• Regulator - oversees banking, regulates insurance rates and automobile registrations, building permits

The Role of the Government

The Role of the Government

• Promoter of National Goals - laws to help us achieve our 7 goals

• Promoter of National Goals - laws to help us achieve our 7 goals

Which 6 of these statements describes capitalism and which 6 describes socialism?

Which 6 of these statements describes capitalism and which 6 describes socialism?

• 1. Most prices are set by state.• 2. Individuals decide answers to the three basic economic

questions in a decentralized way.• 3. The movement of resources follows the lure of profits.• 4. The state owns most of the major factors of production.• 5. Supply and demand determine price levels.• 6. The government enforces private property rights.• 7. The state’s central planning agencies make all basic

economic decisions.• 8. Taxation is often used to redistribute income.• 9. Risk takers may lose money or be rewarded with higher

profits.• 10. The central planning authority strictly controls the

movement of resources, including labor.• 11. All citizens pay for the government’s unsuccessful risk

taking.• 12. Workers are free to move in and out of industries in

competing geographic locations.

• 1. Most prices are set by state.• 2. Individuals decide answers to the three basic economic

questions in a decentralized way.• 3. The movement of resources follows the lure of profits.• 4. The state owns most of the major factors of production.• 5. Supply and demand determine price levels.• 6. The government enforces private property rights.• 7. The state’s central planning agencies make all basic

economic decisions.• 8. Taxation is often used to redistribute income.• 9. Risk takers may lose money or be rewarded with higher

profits.• 10. The central planning authority strictly controls the

movement of resources, including labor.• 11. All citizens pay for the government’s unsuccessful risk

taking.• 12. Workers are free to move in and out of industries in

competing geographic locations.