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

2. Traditional Economies
The allocation of scarce resources and nearly all other economic activity, stems from ritual, habit or custom
Roles are defined by customs
Examples
Aborigines of Australia, Inuits of Canada
Sharing of duties
Advantages
Know your role
Disadvantages
Discourages innovation

3. Command Economies Central authority decides
North Korea and Cuba are two of the last
Advantages
Change their machinery for vastly different products relatively easily
Health services and public services are available at little or no cost to the populace
Disadvantages
Does not meet needs of consumers
No incentive to work hard
Decrease in quality
Large bureaucracy
No flexibility to deal with minor issues

4. Market Economy People and firms act in their own best interest
Advantages
Easy to adjust to change
High amount of individual freedom
RELATIVELY SMALL amount of government interference
Decision-making is small
Large varieties of goods
Disadvantages
Some people get left out of basic needs
Changes in the market cause high uncertainty
Businesses become too powerful

5. Economic/Social Goal terms and facts
Economic freedom is a goal highly valued in the United States.
Economic Efficiency means that resources are used wisely and that benefits gained are greater than costs incurred.
Economic Equity is the social goal that supports laws such as wage and job discrimination.
Most economic systems strive for full employment.
Price Stability –Freedom from inflation
Economic Growth –Growth in an economy

6. Economic Trade Offs among goals
People must compare costs to benefits before resolving the conflict.
Most of the time, people, businesses and government are able to work out conflicts among goals.
The flexibility of the American economic system allows choices and compromises.

7. FREEEEEEEEEDOMMMMM!! We have the free enterprise system
There are five aspects to a free enterprise system

8. Whuteva. . . . .I do what I want Economic Freedom Work where you want
Do what you want
Have your own business
Work for someone else

9. Voluntary Exchange
Act of buyers and sellers freely and willing engaging in market transactions
Both are better off having done the exchange

10. Bling Bling Private Property Rights Incentive to
Privilege that entitles people to own and control their possessions as they wish
Incentive to
Work
Save
Invest

11. C.R.E.A.M. Profit Profit motive
The extent to which persons or organizations are better off at the end of a period than they were at the beginning
Profit motive
Driving force that encourages people and organizations to improve their material well-being
Venture Capitalists

12. Not everyone gets a ribbon
Competition
Struggle among sellers to attract consumers while lowering costs

13. Know your role . . . .jabroni The Entrepreneur Provide the investment
Bill Gates
Steve Jobs
Fifty Cent
Lots of failures
The consumer
Consumer sovereignty describes the role of the consumer as sovereign, or ruler, of the market.
Our choices dictate the market
New Coke, Brushups, Daewoo cars, the HP Touchpad (WebOS)
Government
Protector
Provider and consumer
Regulator
Promoter of national goals
Mixed economy

14. Competition (or lack thereof)
In order to determine the aspects of a free market, there are three types of competitive structures

15. System where one company has almost complete control over the market
Barrier to entry is almost impossible to break
Examples
Cable internet in your town
Electric providers

16. Oligopoly Scenario where a few companies control the market
Many barriers to entry
Examples
Oil companies
Cell phone providers

17. Competitive Market Buyers and sellers are free to choose their actions
Limited to almost no barriers to entry
The US, having a mixed economy, has no true free market
Think about a flea market

18. Creative Destruction
A term coined by Joseph Schumpeter in his work entitled "Capitalism, Socialism and Democracy" (1942) to denote a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."