Economic Systems & Economic Systems & Decision Making Decision Making

Economic Systems & Economic Systems & Decision Making Decision Making

Chapter TwoChapter 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 Section 2: Evaluating Economic PerformanceEconomic 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