Ch. 2: Economic Systems and Decision Making

1. Ch. 2: Economic Systems and Decision Making

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. Advantages Everyone knows the role to play Life is stable, predictable, continuous Disadvantages Discourage new ideas Lack of progress = lower standard of living Traditional Economies

4. Command Economies • Central authority makes the what, how, and for whom decisions • People have very little, if any, influence • Ex? • North Korea, China, former Soviet Union, Cuba

5. 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 Command Economy: Advantages

6. Command Economy: Disadvantages • 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… • Markets must be reasonably competitive; • Resources must be reasonably free to move from one activity to another; • Consumers need access to adequate information so that they may weigh the alternatives and make wise choices **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 • Congress established Social Security which provides disability and retirement benefits for virtually all working people • Full Employment: The economic system will provide as many jobs as possible

14. Economic and Social Goals • Price Stability: Stable prices • Inflation: Rise in general level of prices-workers need more $$ to pay for food, clothing, shelter; • Fixed Income: An income that does not increase even though prices go up

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. Competition 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