Evaluating Economic Performance

Economic and Social Goals

Seven Major Social/Economic Goals:

1. Economic Freedom

2. Economic Efficiency

3. Economic Equality

4. Economic Security

5. Full Employment

6. Price Stability

7. Economic Growth

Freedom

Economic Freedom

• Ability to choose one’s:

• Occupation

• Employer

• Uses for money

• Businesses choose where and how they want to produce

Efficiency

Economic Efficiency

• Resources are scarce, so factors of production must be used wisely

• As a society, we try to ensure that the benefits gained from use of the four factors are greater than costs incurred

Equity

Economic Equity

• Equal pay for equal work

• It is against the law to discriminate on the basis of gender, age, race, religion, or disability

• Law protects consumers from fraud and misrepresentation

Security

Economic Security

What to do if members of society become ill, are harmed in an accident, or the economy just leaves them behind?

• Disability insurance

• Unemployment benefits

• Medicare/Medicaid

• Social Security

Full Employment

Full Employment

• People with jobs save society money because society does not have to expend funds supporting them

• People with jobs also make money for society because they buy and sell, contributing to the economy as a whole

Price Stability

Price Stability

• Preventing inflation – a rise in the general level of prices – is one major economic goal

• When inflation occurs, those on a fixed income have less buying power

• Interest rates rise

• Business activity slows down

• Price stability makes it easier to plan, adds a degree of certainty to the future

Growth

Economic Growth

• First, as population increases, we need a larger economy just to maintain the current standard of living

• Second, most people want their standard of living to improve over the course of their lives – growth is necessary to do that

Trade-Offs

Oftentimes these goals can conflict in some way

Raising tariffs to protect the U.S. shoe industry could create jobs, leading to full employment – but it also conflicts with our goal of economic freedom

Raising the minimum wage could contribute to equity – on the other hand, it could interfere with both efficiency and freedom to pay whatever wages the employer deems appropriate

Capitalism and Economic Freedom

Under capitalism, private citizens own the factors of production

Free enterprise is also used to describe our market system

Ideal of a free enterprise system is to allow competition with a minimum of government interference

Competition and Free Enterprise

5 Characteristics of Free Enterprise Economy

1. Economic Freedom

2. Voluntary Exchange

3. Private Property Rights

4. Profit Motive

5. Competition

Economic Freedom

Private actors can choose to work where and when they want to work

Possible to choose whether to start a business, or whether to be someone else’s employee

Employees can choose to leave, or employers can choose to make an employee leave

Businesses can set prices however they want, productive whatever they want, and make as much or as little as they want

Voluntary Exchange

Buyers and sellers have to agree

Transactions are made in such a way that both the buyer and seller are better off after the exchange

- Idea that you don’t have to spend your money, so if you did exchange it for something, you found that good/service more valuable than the money

Private Property Rights

You own tangible possessions like homes, cars, clothes, etc.

People also own intangibles likes skills and talents

In terms of efficiency, property generally promotes more efficient use

Private property rights provide incentives to work, save, and invest

Profit Motive

Possibility of financial gain encourages economic actors to take risks

Profit – the extent to which a person or organization is better off at the end of a period than they were at the beginning

Profit motive – encourages people and organizations to improve their material well-being

Competition

The struggle among sellers to attract consumers while lowering costs

Customers get to choose where they spend their money, so entrepreneurs have an incentive to make them happy

Ideally, the result is that goods and services are produced at the lowest cost and are allocated to those who are willing and able to pay for them

Entrepreneurs and Consumers

Role of the Entrepreneur:

Organize land, capital, and labor in order to seek profit

Entrepreneurs take the risk that they can provide something consumers want at a price consumers are willing to pay

Role of the Consumer:

“consumer sovereignty” – the consumers decide which businesses fail and which businesses succeed

Q: What’s the assumption here?

The Role of Government

1. Protector

2. Provider and Consumer

3. Regulator

4. Promoter of National Goals

Protector

Even in a free market, the game has rules. Government’s job is to enforce those rules.

Enforces laws against:

• False/misleading advertising

• Unsafe food and drugs

• Environmental hazards

• Unsafe automobiles

• Abuses of individual freedoms

Provider and Consumer

Government provides national defense for everyone

Education and public welfare are distributed by both states and the federal government

Roads, parks, libraries, public transportation

The government can also act as a consumer – it has to buy the materials and labor to construct public works and provide public services

Regulator

Government has a role in preserving competition in the marketplace

Oversees:

• Interstate commerce

• Communications

• Banking

• Nuclear energy

• Building and zoning permits

Promoter of National Goals

Remember our seven goals: freedom, efficiency, equity, security, full employment, price stability, and economic growth

We have laws outlawing child labor and providing Social Security – we chose to use government to modify our economy to meet certain goals

U.S. (and essentially every other market economy) has a mixed economy – also called a modified private enterprise economy