1. Economic Systems and Decision Making
Chapter 2
Economic Systems and Decision Making

2. Essential Questions
Chapter EQ: What is the best choice for an economic system?
2.1 EQ: What’s your option?
2.2 EQ: How do we evaluate economic performance?
2.3 EQ: How are consumers are entrepreneurs dependent on each other?

3. 2.1 Economic Systems

4. I. Traditional Economies
1. In a traditional economy, roles and economic decisions are defined by custom
This is a
picture of
the Inuits
of N. Canada

5. Traditional Economies
A) Advantages: everyone knows which role to play and little uncertainty of what, how and for whom to produce
B) Disadvantages: a discouragement of new ideas and new ways of thinking. Also, typically a lower standard of living

6. Discussion Question
How would life been different for you if you had grown up in a traditional economy?
We would not be able to make our own economic decision. We would have to mimic our elders.

7. II. Command Economies
2. In a command economy, a central authority determines what, how and for whom to produce.

8. Command Economy A) Advantages:
i. The ability to drastically change direction is a short period of time
ii. many basic health and public services are available at little to no cost

9. Command Economy B) Disadvantages: i. Consumer needs may not be met
ii. The necessary decision making bureaucracy delays decisions
iii. Little flexibility to deal with day to day problems
iv. Individual initiative goes unrewarded

10. Individual Question
In what ways are traditional and command economies alike? Different?
Production decisions already made and little initiative is discourages.
Traditional: individual role is defined by customs
Command: individual role defined by central authority

11. III. Market Economies
3. In a market economy, producers and consumers determine what, how and for whom to produce.
a. In each market transaction the consumer’s dollar acts as a “vote” ensuring that producers continue to bring to the market goods and services that consumers want to buy.

12. Market Economies

13. Market Economies Advantages: i. Ability to adjust to change
ii. Individual freedom
iii. Small amount of govt. involvement
iv. A variety of goods and services created
v. Consumer satisfaction

14. Market Economy B) Disadvantages
i. Inability to meet everyone’ s basic needs
ii. Often a lack of education and health care
iii. A high level of personal uncertainty and prospect of economic failure

15. What are your options?
Looking at the notes from 2.1, what are your options for different market economies?
Traditional
Command
Market

16. 2.2 Evaluating Economic Performance

17. I. Economic and Social Goals
Economic Freedom, or the freedom for people to make their own economic decisions, is a goal highly valued in the US.
Economic efficiency means that resources are used wisely and that the benefits gained are greater than the costs incurred.

18. Economic and Social Goals
C. Economic equity is the social goal that explains why so many people support laws against wage and job discrimination.
D. Economic security is the social goal that results in programs to help support the ill, the elderly and workers who have lost their jobs.

19. Economic and Social Goals
E. Most economic systems strive for full employment, or providing as many jobs as possible.
F. Price stability, or freedom from inflation, is important to anyone trying to provide basic necessities on a limited income and for anyone planning their economic future.

20. Economic and Social Goals
G. Economic growth is an important goal because populations tend to increase and existing populations tend to want more goods and services.

21. Individual Question
In your opinion, which of these economic goals is most important?
Please provide an explanation

22. II. Trade-offs among goals
What is a trade-off?
Alternative choices people face in making an economic decisions.

23. Trade-offs among goals
When goals are at odds, people must compare costs to benefits before resolving the conflict.
Most of the time, people are able to work out conflicts among goals
The flexibility of the American economic system allows choices and compromises.

24. Discussion Question
Does the idea of minimum wage support the goal of economic equity? With which goal does it conflict?
Economic Freedom
Full Employment
Price Stability

25. How do we evaluate economic performance?
We evaluate economic performance by measuring our economic activity with the intended goals.
Do they meet our expectations? What should we change? How can we continue economic growth?

26. 2.3 Capitalism and Economic Freedom

27. I. Competition and Free Enterprise
Capitalism is a market economy in which private citizens own the factors of production…
What are our 3 major FoP?
Land, Labor, Capital
… in a free enterprise system, there is limited govt. interference and businesses are free to compete.

29. Capitalism and Economic Freedom
B) With economic freedom, people and businesses make their own economic choices.
C) The result of voluntary exchange results in both buyers and sellers believing that the good or service they receive is more important than the money or product given up.

30. Capitalism and Economic Freedom
D) The profit motive encourages entrepreneurship and is largely responsible for the growth of free enterprise economy.
E) Competition among sellers helps lower prices

32. II. The role of the entrepreneur
A) Entrepreneurs use land, labor and capital to make a profit
B) When they are successful everybody benefits.
C) Their search for profits lead to new products, greater competition, more production, higher quality, and lower prices for consumers.

33. Discussion Question
What would you like most about owning your own business?
What would be least attractive to you?

34. III. The role of the consumer
A) In a market economy, the purchases of the consumer identify the ‘wants’ of the consumers.
B) The dollars consumers spend are their votes for the most popular products.

36. IV. The role of the Government
As a protector, the govt. may pass and enforce laws meant to prevent the abuse of consumers and workers.
Governments are both providers and consumers
As a regulator, govt. preserves competition

37. 2.3 EQ How are consumers and entrepreneurs dependent on each other?
Entrepreneurs make goods available to the consumers
Consumers guide entrepreneurs what will and will not successfully sell.

38. Chapter EQ
What is the best choice for an economic system? WHY?