Economic Systems and Decision Making

Economic System All societies have an economic system of some form. An organized way of providing for the wants and needs of their people.

Traditional Economies The allocation of scarce resources, and nearly all other economic activity, stems from ritual, habit, or custom. Habit and custom also dictate most social behavior. Roles are defined by customs of elders or ancestors. Example: Inuit tribe teaching children to hunt and fish.

Command Economy Central authority makes most of the what, how, and for whom decisions. Government makes the decisions.

Market Economy People and firms act in their own best interests to answer the what, how, and for whom questions. Allows buyers and sellers to come together in order to exchange goods and services. People’s decisions act as “votes.” Example: Decision to buy a product (Dollar vote)

Evaluating Economic Performance Economic and Social Goals Freedom Efficiency Equity Security Employment Price Stability Growth

Price Stability Goal is to keep prices stable. Inflation: A rise in the general level of prices. Fixed income: An income that does not increase even though prices go up.

Capitalism and Economic Freedom Voluntary exchange: The act of buyers and sellers freely and willingly engaging in market transactions. Private property rights: Allows people to own and control their possessions as they wish.

Competition Possible because private individuals, acting as entrepreneurs, own the factors of production and have the freedom to produce the products they think will be the most profitable.

Role of Government Protector Provider and Consumer Regulator Promoter of National Goals