economic systems and decision making. economic systems economic system: -a particular set of...
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Economic Systems and Decision Making
Economic Systems
Economic System:
- A particular set of institutional arrangements and a coordinating mechanism to respond to the economizing problem
Economic systems differ in two factors:
1. Who owns the factors of production
2. The method used to motivate, coordinate and direct economic activity
Traditional, Command, and Market
EconomiesTraditional Economies:
- Based on custom and tradition
- Allocate resources and regulate economic activity through ritual, habit, and social behavior
- For most people, their roles are defined by accidents of birth (family, gender, etc.)
Examples: Australian Aborigines, Inuits
Traditional, Command, and Market
EconomiesAdvantages of Traditional Economies
Everyone knows what to do
Very little insecurity about what to produce, how to produce it, and for whom something is produced
Disadvantages
No progress
Discourages innovation
Lower living standards
Traditional, Command, and Market
EconomiesCommand Economies
- A central authority makes most of the decisions about what to produce, how to produce it, and for whom to produce it
- Idea is that centralizing industries should lead to economies of scale, and ultimately make everything cheaper and more abundant than in a free market system
Examples: North Korea, Cuba, former Soviet Union
Traditional, Command, and Market
EconomiesAdvantages of Command Economies
Capable of extremely rapid (if also extremely painful) economic change
Public services like health care, education, etc. are costs borne by the state
Disadvantages
Unresponsive to consumers
Lack of incentives to work hard
Requires a giant bureaucracy
Very little flexibility
Traditional, Command, and Market
Economies
Market Economies
- Private actors pursue their own self-interest to determine what to produce, how to produce it, and for whom to produce it
- Individual purchasing decisions act as votes
Examples: United States, Japan, Germany, Great Britain (honestly this is pretty much everyone at this point)
Traditional, Command, and Market
EconomiesAdvantages of Market Economies
Can adjust to change over time
High degree of individual freedom
Relatively small degree of government interference
Decision making is decentralized, and so more responsive and usually more accurate
Incredible amount of variety of goods and services
Consumer-oriented, and therefore people-oriented
Traditional, Command, and Market
EconomiesDisadvantages of Market Economies
A pure laissez-faire system does not provide for the basic needs of everyone in society
Cannot provide public services effectively:
- justice system
- national defense
- universal education
- comprehensive health care
High degree of uncertainty/instability
Traditional, Command, and Market
EconomiesDisadvantages of Market Economies (cont’d)
Market failures can occur if any of the following conditions do not exist:
Markets must be reasonably competitive
Resources must be free to move from one activity to another
Consumers need access to enough information to make an informed decision(when I have better information than you do, and use that to my advantage and your disadvantage, we have asymmetrical information)
Characteristics of the Market System
private property
freedom of enterprise/choice
self-interest
competition
markets and prices
technology and capital goods
specialization
use of money
active, but limited, government