Economic Systems & Decision Making Chapter 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 Economic 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