Economic Systems and Decision Making Chapter Two Economic Systems and Decision Making

Traditional Economies The allocation of scarce resources and nearly all other economic activity, stems from ritual, habit or custom Roles are defined by customs Examples Aborigines of Australia, Inuits of Canada Sharing of duties Advantages Know your role Disadvantages Discourages innovation

Command Economies Central authority decides North Korea and Cuba are two of the last Advantages Change their machinery for vastly different products relatively easily Health services and public services are available at little or no cost to the populace Disadvantages Does not meet needs of consumers No incentive to work hard Decrease in quality Large bureaucracy No flexibility to deal with minor issues

Market Economy People and firms act in their own best interest Advantages Easy to adjust to change High amount of individual freedom RELATIVELY SMALL amount of government interference Decision-making is small Large varieties of goods Disadvantages Some people get left out of basic needs Changes in the market cause high uncertainty Businesses become too powerful

Economic/Social Goal terms and facts Economic freedom is a goal highly valued in the United States. Economic Efficiency means that resources are used wisely and that benefits gained are greater than costs incurred. Economic Equity is the social goal that supports laws such as wage and job discrimination. Most economic systems strive for full employment. Price Stability –Freedom from inflation Economic Growth –Growth in an economy

Economic Trade Offs among goals People must compare costs to benefits before resolving the conflict. Most of the time, people, businesses and government are able to work out conflicts among goals. The flexibility of the American economic system allows choices and compromises.

FREEEEEEEEEDOMMMMM!! We have the free enterprise system There are five aspects to a free enterprise system

Whuteva. . . . .I do what I want Economic Freedom Work where you want Do what you want Have your own business Work for someone else

Voluntary Exchange Act of buyers and sellers freely and willing engaging in market transactions Both are better off having done the exchange

Bling Bling Private Property Rights Incentive to Privilege that entitles people to own and control their possessions as they wish Incentive to Work Save Invest

C.R.E.A.M. Profit Profit motive The extent to which persons or organizations are better off at the end of a period than they were at the beginning Profit motive Driving force that encourages people and organizations to improve their material well-being Venture Capitalists

Not everyone gets a ribbon Competition Struggle among sellers to attract consumers while lowering costs

Know your role . . . .jabroni The Entrepreneur Provide the investment Bill Gates Steve Jobs Fifty Cent Lots of failures The consumer Consumer sovereignty describes the role of the consumer as sovereign, or ruler, of the market. Our choices dictate the market New Coke, Brushups, Daewoo cars, the HP Touchpad (WebOS) Government Protector Provider and consumer Regulator Promoter of national goals Mixed economy

Competition (or lack thereof) In order to determine the aspects of a free market, there are three types of competitive structures

System where one company has almost complete control over the market Barrier to entry is almost impossible to break Examples Cable internet in your town Electric providers

Oligopoly Scenario where a few companies control the market Many barriers to entry Examples Oil companies Cell phone providers

Competitive Market Buyers and sellers are free to choose their actions Limited to almost no barriers to entry The US, having a mixed economy, has no true free market Think about a flea market

Creative Destruction A term coined by Joseph Schumpeter in his work entitled "Capitalism, Socialism and Democracy" (1942) to denote a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."