unit 2 economic systems different methods can be used to allocate goods and services. people, acting...
TRANSCRIPT
Unit 2 Economic Systems
•Different methods can be used to allocate goods and services. People, acting individually or collectively through government, must choose which methods to use to allocate different kinds of goods and services.•People respond predictably to positive and negative incentives.
Economic systems
• Economic system is organization of how a society uses it’s scarce resources to satisfy its unlimited wants– Framework of laws, rules written &
unwritten which provide incentives & influence behavior
– “Rules to the game of life” not the board game
Economic SystemsWho
answers the basic econ ?’s
Traditional
Command
Market
What to produce?
Decisions by customs & past actions
Decisions by government & central planners
Decisions by individuals & businesses
How to produce?
Decisions by customs & past actions
Decisions by government & central planners
Decisions by individuals & businesses
Who gets what?
Decisions by customs & past actions
Decisions by government & central planners
Decisions by individuals & businesses
Comparison of Economic Systems
Traditional Command Market
Economic decisions made by:
Ownership:
Customs, past actions
Community owned
Government & Central Planners
Public ownership ~ society
Businesses & IndividualsSupply & Demand
Private owner ~ individual
Incentive for success/Behavior
Reward staying in society/survival Bhv: Repeat past actions
Reward better job, housing, power eliteBhv: Do what your told
Reward $$$$ Bhv: Wise choices
Role of technology
Farming methods
Hand tools; No technologyHuman & animal powerNo machines
Technology usedTractors & gas/oil powerMachines
Technology usedTractors & gas/oil powerMachines
Advantages
Strong sense of communityEveryone is “valued”Little stress about future
Prioritize projectsZero unemployment“Free” day care, educ, housingRelative equality
Strong motivation for workEfficient use of resourcesLots of economic freedom Consumers
Disadvantages
Inefficient productionSurvival modeLittle leisure time
Little flexibility/individualityLarge bureaucracyLack of effective incentives Consumers
Uneven distribution of wealth/income ~ povertyMarket failuresUncertainty; business cycle
Examples Amish communityAnt colony in Bug’s Life
Former USSRCubaNorth Korea
United StatesJapanGermany
Economic Goals• economic freedom ~ right to accept/reject a job
open/close a business• economic equity (justice) ~ relatively equal
distribution of wealth, small gap between rich & poor• economic stability ~ prices relatively constant, no
inflation, no recession, depression• economic efficiency ~ best use of resources, increase
profit by making products cheaper• economic security ~ safety net for those unable to
work, elderly, unemployed• economic growth ~ increase standard of living by
making more stuff, increasing GDP
Economic SpectrumEach nation is unique mixture of command & market
elements.
Command Market
All nations are mixed economic systems.
Broad Social Goals in Command and Market Economies
Broad Social Goals In Command Economies In Market Economies
Economic efficiency Resource allocation established by central planners.
State-owned businesses are often in efficient but rarely
allowed to fail
Most allocation decisions made by consumers and
producers in markets. Extensive specialization and international trade increase
productivity and competition.
Economic Equity Wages often set by government to provide greater
equality of income. Opportunities for moving or changing jobs are limited, so
jobs may not make use of individuals’ skills and abilities.
Equality of opportunity, people are free to make own decisions on how to use their resources
and capabilities but no guarantee of success. Income depends on the value of labor
and other resources and individual has to sell.
Broad Social Goals in Command and Market Economies
Economic freedom Government ownership of most capital and land
resources, many decisions made by central planners.
Private ownership of all kinds of resources is allowed, and individual freedom and
control of resources is highly valued.
Economic Growth Growth targets set by central planners who assign output quotas for different firms. Weak incentives to reduce waste. Plant facilities and
equipment maintenance often a problem.
Incentives for individuals and businesses to produce
more and avoid waste encourage efficient use of resources. Specialization, investment in capital and workers’ education and
training, and trade encourage higher levels of output.
Broad Social Goals in Command and Market Economies
Economic Security Pensions, jobs, income, housing, and health care
provided or guaranteed by the government.
Generally, individuals are responsible for their own health
care, retirement benefits, housing, and income. But there are some government programs to reduce
risks and provide increased economic security such as
assistance for low-income families, unemployment compensation,
social security, and government job training programs.
Economic Stability No unemployment, prices usually set below price to ensure that goods are sold,
which controls official measures of inflation.
Some unemployment is tolerated, income depends on the resources and individual has to
sell, the federal government uses monetary and fiscal policies to
reduce unemployment and inflation and encourage
economic growth.
Unit 2 Review
economic system
Organization of how a society uses it’s scarce resources to satisfy it’s unlimited wants. (Framework of laws written and unwritten)
traditional economic system
3 basic economic questions answered by actions of past generations or customs.
command economic system
3 basic economic questions answered by decisions of government or central planners.
market economic system
3 basic economic questions answered by decisions of individuals or businesses.
mixed economic system
3 basic economic questions answered through a combination of command, market, and traditional decisions. All nations are mixed economies.
dynamic
Constantly changing, shifting, moving. Economic systems are dynamic because of world events, change in government leaders, society’s values, or technology
economic spectrum
Economic decision-making is a range between command and market systems. Each nation is a unique combination of command & market systems.
Unit 2 Review
standard of livingThe quantity and quality of goods and services available to an individual or society.
nationalized or nationalization
The transformation of privately owned business into public ownership.
privatized or privatization
The transformation of publicly owned business into a privately owned one.
socialism
Economic system in which the means of production are owned by the government and resources are distributed thru central planning. Command economic system
capitalism
An economic system in which the means of production are owned by individuals and businesses and resources are privately owned. Market economic system
private propertyAbility of an individual to own and exercise control over scarce resources.
Unit 2 Review
eminent domainThe right of government to acquire private property for public use by paying fair market value.
consumer sovereignty
The freedom of buyers to choose which goods and services to buy.
profit motiveThe desire of businesses to earn greatest amount of money. Incentive for business
free enterpriseThe freedom of business to make decisions to earn maximum dollars.
competitionThe rivalry among businesses for consumer dollars.
Unit 2 Review
economic goalsDesirable economic targets for policymakers which will benefit society.
economic freedomOpen/close business, pick job, spend or save $Wise choices of businesses & individuals.
economic efficiency
Wise use of resources, no idle resources or waste. Maximum production of resources.
economic equityDistribution of income/wealth. Poverty and gap between the rich and poor.
economic growth
The increase in production of goods and services over time; Measured by GDP or GDP/capita. Increased economic growth leads to an increasing standard of living.
economic stabilityStable prices (low inflation) and full employment (low unemployment)
economic securityFinancial safety net for young, old, disabled, unemployed, and sick.