economic systems & decision making chapter two. traditional economies allocation of scarce...
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Economic Systems & Economic Systems & Decision Making Decision Making
Economic Systems & Economic Systems & Decision Making Decision Making
Chapter TwoChapter Two
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Section 2: Evaluating Section 2: Evaluating Economic PerformanceEconomic Performance
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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
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Economic and Social Goals
• Economic Security: We desire protection from layoffs and illness
• Full Employment: The economic system will provide as many jobs as possible
• Price Stability: Stable prices
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Economic and Social Goals
• Control Inflation: Rise in general level of prices-workers need more $$ to pay for food, clothing, shelter;
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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…
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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?
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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
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Capitalism and Free Enterprise
• A free enterprise economy has 5 important characteristics:
• Economic freedom• Voluntary exchange• Private property rights• Profit motive• Competition
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Economic Freedom
• People have the right to choose:
• Occupation• Employer• Self-Employed
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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
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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
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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
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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
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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
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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
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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
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Provider and Consumer
• All levels of government provide goods and services for its citizens:
• National government defense services• State government education & public
welfare• Local governments libraries, parks, etc• Government consumes factors of
production, 2nd largest consumer
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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
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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?
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Promoter of National Goals
• The United States is said to have a Mixed Economy or a Modified Private Enterprise Economy