1. Economic Systems & Decision Making
Chapter Two

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. Section 2: Evaluating Economic Performance

12. 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

13. 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

14. Economic and Social Goals
Control Inflation: Rise in general level of prices-workers need more $$ to pay for food, clothing, shelter;

15. 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…

16. 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?

17. 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

18. Capitalism and Free Enterprise
A free enterprise economy has 5 important characteristics:
Economic freedom
Voluntary exchange
Private property rights
Profit motive
Competition

19. Economic Freedom People have the right to choose: Occupation Employer
Self-Employed

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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?

30. Promoter of National Goals
The United States is said to have a Mixed Economy or a Modified Private Enterprise Economy