Intro to BusinessEconomic Systems

Three Economic Questions

What goods and services will be produced?› What do we have?

How will they be produced?› Hand > machine >

elsewhere

Who gets the stuff?

3 Economic Systems

Economic system (economy) – an organized way of providing for the wants and needs of people.

1). Command2). Market3). Traditional

Command Economies

Economic activity is planned out by the government, with people having little influence.

Examples:› Cuba› North Korea› Former Soviet Union

Command Economies - Pros

Allows an economy to change direction very quickly. › After Stalin’s first two Five Year Plans, Russia

moved from a rural agricultural economy to an industrial economy.

Command Economies - Pros

Little uncertainty as to who will do what.

No unemployment because the government gives everyone a job (whether it is needed or not).› Ayn Rand - Anthem

Command Economies - Cons

Not designed to meet the wants of consumers. › Stalin’s Five Year Plan directed resources

away from both agriculture and consumer goods.

Provides strange incentives› Do just enough to meet quotas.

Command Economies – More Cons

No rewards for individual performance.› Tetris

No flexibility to handle problems. › Great Depression disrupted the USSR’s

First Five Year Plan Requires a large decision making

agency.› Stalin’s Five Year Plans governed all

economic activity in Russia…that’s a lot of paperwork!

Market Economies People and businesses act in their own

best interests to answer the three basic economic questions.

Market Economies – How they work

Lure of personal and financial gain leads consumers and businesses to interact in various markets.

Each person acts as they see fit in order to advance their own interests.

The First Economist – Adam Smith

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” – Wealth of Nations, 1776

Market Economies - Pros

Economy can adjust to change over time› Businesses can adapt to changing consumer

tastes by creating new/different products.

High degree of individual freedom› Businesses and individuals are free to do

what they want.

Market Economies – More Pros

Small degree of government interference (Mixed Economy)

Economic decisions are made by all, not limited to government officials.

Seemingly unlimited variety of goods and services available to consumers.

Market Economies - Cons Does not provide for the basic needs of

everyone.› Elderly, disabled and other groups would be

unable to survive in a market economy without governmental assistance.

Market Economies – More Cons Does not provide certain services that people

value.› National Defense & Education.

High degree of uncertainty› Tommy Boy› Jobs going overseas› Market Failures

Traditional Economies

Economic activity is based on tradition with roles determined by previous generations.

Examples:› Medieval Europe› Various hunting tribes

in Africa and northern Canada

Traditional Economies – Pros

Everyone knows what their role is.

Life is generally predictable and stable.

Traditional Economies - Cons

Discourages new ideas and new ways of doing things.

Lack of progress leads to a lower standard of living.

The US Economic System

Mixed Economy

Capitalism

Based on 4 important principles› Private Property› Freedom of choice› Profit› Competition

6 Economic Social Goals

Economic Freedom Economic Equity Economic Security Price Stability Economic Growth Economic Efficiency

Economic Freedom

Individuals have freedom to choose their own occupations, employers, and spending habits.

Businesses have freedom to choose how and where to produce goods/services.

Are we meeting this goal?

Economic Equity

People should receive equal pay for equal work.

People should receive adequate pay for the work they perform.

People should all have the same opportunities to get ahead.

Are we meeting this goal?

Economic Security

We should have protection from negative economic events such as layoffs and injuries.› Social Security – federal program that

provides disability and retirement benefits.› Medicare

Everyone should have their basic needs met.

Are we meeting this goal?

Price Stability

We should have stable prices that protect against inflation.› Inflation – a rise in the general level of

prices.

Are we meeting this goal?

Economic Growth

Increasing the production of goods and services over time

Measuring by gross domestic product (GDP)

Constant Improvement

Economic Efficiency

Insuring optimal utilization of scarce resources; prevention of waste of the nation’s resources; and getting the most out of available resources.

Max value for min. cost

When economic goals are not met…

…People get mad!!!!!!!

Bruce Springsteen – Working on a Dream

Homework: Listen to the song. As you listen, think and then write down his view about the goals of:

Economic Equity? Economic Security?

Find a song that sings about economic hardship, write a short (1 page) paper identifying the song (and lyrics) and discussing how it applies to our country’s economic shortcomings.