ECONOMIC SYSTEMS and AMERICAN FREE ENTERPRISE

Economic Systems Defn The ways a country answers the 3 basic economic questions determines which economic system they have 4 Economic Systems:  Free Market (aka Free Enterprise, Capitalism, and Laissez Faire)  Command (centrally planned)  Traditional  Mixed

Economic Goals: Shared by most societies Importance based on the needs and values of each society 1.Economic efficiency- making the most of resources 2.Economic freedom- Freedom from govt intervention in the production and distribution of goods and services

3. Economic security and predictability- Assurance that g & s will be available. 4. Economic equity- Fair distribution of wealth 5. Economic growth and innovation- GDP Innovation leads to economic growth, and growth leads to a higher standard of living. 6. Economic stability- no drastic fluctuations in prices; no ups and downs

Traditional Economies: People rely on traditions or customs to make the what, how, and who choices Less common and usually found in rural areas/ less modern Based on agricultural industries Meant to meet local needs Kids tend to have the same jobs as their parents by gender

Command (Centrally Planned) Economies: Govt owns factors of production Govt answers the 3 economic questions There is NO self-interest or competition Socialism- uses democratic means to distribute wealth evenly; tries to couple political equality with economic equality Communism- ALL power in hands of govt; usually preceded by violent revolution. It doesn’t allow democracy- usually authoritarian ex- Soviet Union ; Romania til 1989

Advantages of Centrally Planned Economies: Can jump-start select industries Guarantee jobs and wages Disadvantages: Poor quality Serious shortages of non-priority goods and services Diminishing production

Can’t meet consumers wants/ needs Lacks incentives/ rewards to workers; discourages change & innovation Lacks flexibility Decisions become overly complicated Sacrifices individual freedom for social goals ** Most command economies have moved toward mixed economies b/c they can’t meet consumer’s needs, were inefficient, and public unrest due to lack of freedom

Free Market: Market- defn ex- mall, internet, catalogue, etc. Specialize- defn markets allow for easy exchanges of goods/services we specialize in for those that others specialize in Free Market- defn Ask yourself: who owns the factors of production?? What motivates us? If this is true, how can we promote the best interests of society as well? Adam Smith- father of economics; Wealth of Nations He said we are guided by the invisible hand (defn) and competition regulates us.

4 Pillars of Free Enterprise: 1.Private property- we decide how to use/care for things we own; this gives us incentive to use our resources efficiently 2.Price system- prices guide us by giving us information about products/ resources; they also provide us with strong incentives

3. Market competition- scarcity makes firms and consumers compete for g & s -firms compete for profits (defn) P=TR-TC 4. Entrepreneurship- encouraged by Free Mkt by providing incentives; this encourages growth

Circular Flow of G/S & Money: Definitions: circular flow, households, firms 4 components: –Households –Markets for Resources (Factor Mkt) –Production of Goods and Services –Goods and Services Market (Product Mkt)

Mixed Economies: No economy is purely command or free- some are more one than the other One advantage is individuals make their own economic choices but the govt provides goods and services people wouldn’t have otherwise China is mixed on the side of command- they are in “transition” Let’s compare economic systems (see tran)

American Free Enterprise: Goals of US economy- * full employment- jobs for all who are able * economic growth- higher standard of living (defn) Gross Domestic Product (total value of all G&S produced in an economy) is one tool we use to measure economic growth/ business cycle (defn)

* stability * freedom * security * equality * efficiency Free market needs govt intervention to provide what the mkt can’t/ ex?? Free mkt encourages economic growth.

Government’s Role in Free Mkt: Do they have one? If so, what and to what extent? Is public interest their job? Do they ever go beyond the boundaries? Is it fair to say, “majority rule but minority rights?” Is it right? To what extent are we a mixed economy? Should the govt intervene in the economy in an effort to make it better? Does this sacrifice any of our rights?

Providing Public Goods: –Public good (defn) a shared good or service for which it would be inefficient or impractical 1) to make consumers pay individually and 2) to exclude nonpayers ex: roads, bridges, dams, space program What would happen if you had to pay to have a road built in front of your house?

–private good (defn) goods that provide benefit only to the purchaser; these goods are produced b/c of the incentive the producer receives for it –Free rider problem: people benefit from a G/ S & would not choose to pay for it ex: Would you be willing to pay equally for your share of the costs associated with running the military?

Providing a Safety Net: Why should we provide a safety net for those who can’t seem to support themselves? As a society, we recognize some responsibilities to the very young, very old, sick, poor, and the disabled. They deserve to have at least a minimal standard of living. Govt attempts to do this by redistributing income through taxation and welfare programs such as cash transfers (social security, worker’s comp, unemployment), in-kind benefits (food stamps, WIC, legal aid, housing), medical benefits, and education benefits