Unit 2 Economic Systems Different methods can be used to allocate goods and services. People, acting individually or collectively through government, must choose which methods to use to allocate different kinds of goods and services. People respond predictably to positive and negative incentives.

Economic systems Economic system is organization of how a society uses it’s scarce resources to satisfy its unlimited wants –Framework of laws, rules written & unwritten which provide incentives & influence behavior –“Rules to the game of life” not the board game

Economic Systems Who answers the basic econ ?’s TraditionalCommandMarket What to produce? Decisions by customs & past actions Decisions by government & central planners Decisions by individuals & businesses How to produce? Decisions by customs & past actions Decisions by government & central planners Decisions by individuals & businesses Who gets what? Decisions by customs & past actions Decisions by government & central planners Decisions by individuals & businesses

Comparison of Economic Systems TraditionalCommandMarket Economic decisions made by: Ownership: Customs, past actions Community owned Government & Central Planners Public ownership ~ society Businesses & Individuals Supply & Demand Private owner ~ individual Incentive for success/Behavior Reward staying in society/survival Bhv: Repeat past actions Reward better job, housing, power elite Bhv: Do what your told Reward $$$$ Bhv: Wise choices Role of technology Farming methods Hand tools; No technology Human & animal power No machines Technology used Tractors & gas/oil power Machines Technology used Tractors & gas/oil power Machines Advantages Strong sense of community Everyone is “valued” Little stress about future Prioritize projects Zero unemployment “Free” day care, educ, housing Relative equality Strong motivation for work Efficient use of resources Lots of economic freedom Consumers Disadvantages  Inefficient production Survival mode Little leisure time Little flexibility/individuality Large bureaucracy Lack of effective incentives  Consumers Uneven distribution of wealth/income ~ poverty Market failures Uncertainty; business cycle Examples Amish community Ant colony in Bug’s Life Former USSR Cuba North Korea United States Japan Germany

Economic Goals economic freedom ~ right to accept/reject a job open/close a business economic equity (justice) ~ relatively equal distribution of wealth, small gap between rich & poor economic stability ~ prices relatively constant, no inflation, no recession, depression economic efficiency ~ best use of resources, increase profit by making products cheaper economic security ~ safety net for those unable to work, elderly, unemployed economic growth ~ increase standard of living by making more stuff, increasing GDP

Economic Spectrum Each nation is unique mixture of command & market elements. CommandMarket All nations are mixed economic systems.

Broad Social Goals in Command and Market Economies Broad Social GoalsIn Command EconomiesIn Market Economies Economic efficiencyResource allocation established by central planners. State-owned businesses are often in efficient but rarely allowed to fail Most allocation decisions made by consumers and producers in markets. Extensive specialization and international trade increase productivity and competition. Economic EquityWages often set by government to provide greater equality of income. Opportunities for moving or changing jobs are limited, so jobs may not make use of individuals’ skills and abilities. Equality of opportunity, people are free to make own decisions on how to use their resources and capabilities but no guarantee of success. Income depends on the value of labor and other resources and individual has to sell.

Broad Social Goals in Command and Market Economies Economic freedomGovernment ownership of most capital and land resources, many decisions made by central planners. Private ownership of all kinds of resources is allowed, and individual freedom and control of resources is highly valued. Economic GrowthGrowth targets set by central planners who assign output quotas for different firms. Weak incentives to reduce waste. Plant facilities and equipment maintenance often a problem. Incentives for individuals and businesses to produce more and avoid waste encourage efficient use of resources. Specialization, investment in capital and workers’ education and training, and trade encourage higher levels of output.

Broad Social Goals in Command and Market Economies Economic SecurityPensions, jobs, income, housing, and health care provided or guaranteed by the government. Generally, individuals are responsible for their own health care, retirement benefits, housing, and income. But there are some government programs to reduce risks and provide increased economic security such as assistance for low-income families, unemployment compensation, social security, and government job training programs. Economic StabilityNo unemployment, prices usually set below price to ensure that goods are sold, which controls official measures of inflation. Some unemployment is tolerated, income depends on the resources and individual has to sell, the federal government uses monetary and fiscal policies to reduce unemployment and inflation and encourage economic growth.

Unit 2 Review economic system Organization of how a society uses it’s scarce resources to satisfy it’s unlimited wants. (Framework of laws written and unwritten) traditional economic system 3 basic economic questions answered by actions of past generations or customs. command economic system 3 basic economic questions answered by decisions of government or central planners. market economic system 3 basic economic questions answered by decisions of individuals or businesses. mixed economic system 3 basic economic questions answered through a combination of command, market, and traditional decisions. All nations are mixed economies. dynamic Constantly changing, shifting, moving. Economic systems are dynamic because of world events, change in government leaders, society’s values, or technology economic spectrum Economic decision-making is a range between command and market systems. Each nation is a unique combination of command & market systems.

Unit 2 Review standard of living The quantity and quality of goods and services available to an individual or society. nationalized or nationalization The transformation of privately owned business into public ownership. privatized or privatization The transformation of publicly owned business into a privately owned one. socialism Economic system in which the means of production are owned by the government and resources are distributed thru central planning. Command economic system capitalism An economic system in which the means of production are owned by individuals and businesses and resources are privately owned. Market economic system private property Ability of an individual to own and exercise control over scarce resources.

Unit 2 Review eminent domain The right of government to acquire private property for public use by paying fair market value. consumer sovereignty The freedom of buyers to choose which goods and services to buy. profit motive The desire of businesses to earn greatest amount of money. Incentive for business free enterprise The freedom of business to make decisions to earn maximum dollars. competitionThe rivalry among businesses for consumer dollars.

Unit 2 Review economic goals Desirable economic targets for policymakers which will benefit society. economic freedom Open/close business, pick job, spend or save $ Wise choices of businesses & individuals. economic efficiency Wise use of resources, no idle resources or waste. Maximum production of resources. economic equity Distribution of income/wealth. Poverty and gap between the rich and poor. economic growth The increase in production of goods and services over time; Measured by GDP or GDP/capita. Increased economic growth leads to an increasing standard of living. economic stability Stable prices (low inflation) and full employment (low unemployment) economic security Financial safety net for young, old, disabled, unemployed, and sick.