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 desire protection from layoffs and illness

Full Employment: The economic system will provide as many jobs as possible

Price Stability: Stable prices

Economic and Social Goals

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

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 education & public welfare

Local governments libraries, parks, etc

Government consumes factors of production, 2nd 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