Economic systems decision making chapter2week1
- 1. Economic Systems & Decision Making Chapter Two
- 2. Traditional EconomiesAllocation of scarce resources stems from ritual, habit, or customsDictate most social behaviorsDefined by customs of elders/ancestorsEx?African tribes, Aborigines, Inuit
- 3. Traditional EconomiesAdvantagesEveryone knows the role to playLife is stable, predictable, continuousDisadvantagesDiscourage new ideasLack of progress = lower standard of living
- 4. Command EconomiesCentral authority makes the what, how, and for whom decisionsPeople have very little, if any, influenceNorth Korea, former Soviet Union, Cuba
- 5. Command Economy: AdvantagesChange direction drastically in a short amount of timeLittle uncertainty: People do not have to worry about what to study, where they will work, or if they’ll lose jobs
- 6. Command Economy: DisadvantagesDoes not meet the wants of the consumerNo incentive to work hardRequires a large bureaucracyNo flexibility to deal with minor problemsInnovation is difficult to express
- 7. Market EconomiesPeople and firms decide act in their own best interests to answer the what, how, and for whomThe “market” is where buyers and sellers come together to exchange goods and servicesEx: United States, Canada, Great Britain, Europe, South Korea, Japan, Singapore
- 8. Market Economy: AdvantagesOver time, market adjusts to changeAllows for a high degree of individual freedomRelatively small degree of govt. interferenceDecision-making is decentralizedIncredible variety of goods and servicesHigh degree of consumer satisfaction
- 9. Market Economy: DisadvantagesDoes 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 valuedHigh degree of uncertainty that workers and businesses face as a result of change
- 10. Disadvantages, continuedMarket economies fail if 3 conditions are not met…Must be competitiveResources must be mobileConsumers 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 GoalsEconomic Freedom: Freedom to make their own decisions, occupations, employers, goods and servicesEconomic 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 GoalsEconomic Security: We desire protection from layoffs and illnessFull Employment: The economic system will provide as many jobs as possiblePrice Stability: Stable prices
- 14. Economic and Social GoalsControl Inflation: Rise in general level of prices-workers need more $$ to pay for food, clothing, shelter;
- 15. Economic and Social GoalsEconomic Growth: People want a better life; as population grows, so must the economy to continue to meet everyone’s needsFuture Goals: New goals may be added, such as a cleaner environment, etc…
- 16. Trade-Offs Among GoalsSome 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 FreedomA 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 EnterpriseA free enterprise economy has 5 important characteristics:Economic freedomVoluntary exchangePrivate property rightsProfit motiveCompetition
- 19. Economic FreedomPeople have the right to choose:OccupationEmployerSelf-Employed
- 20. Voluntary ExchangeBuyers and sellers are free and willing to engage in market transactionsBoth parties obtain something they believe has more has more value than the money or products they gave up
- 21. Private Property RightsPrivilege that entitles people to own and control their own possessions as they wishPrivate property gives people the incentive to work, save, invest, and be successful
- 22. Profit MotivePeople are free to risk their savings or any part of their wealth in a business ventureProfit is the extent to which persons or organizations are better off at the end of a period than they were at the beginningTotal revenue – Total Costs = PROFITThe driving force that encourages people/organizations to improve their material well being
- 23. CompetitionThe struggle among sellers to attract customers while lowering costsThe 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 EntrepreneurOrganize and manage land, labor, and capital in order to seek profitWant to be their own boss and are willing to risk everything to make their dreams come true…Many fail
- 25. The Role of the ConsumerIn 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 GovernmentActs 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 ConsumerAll levels of government provide goods and services for its citizens:National government defense servicesState government education & public welfareLocal governments libraries, parks, etcGovernment consumes factors of production, 2nd largest consumer
- 28. RegulatorNational government is charged with preserving competition in the marketplaceVery controversial. Why?Most companies do not want to be told how to run their affairs
- 29. Promoter of National GoalsGovernment reflects the will of a majority of its peopleMust modify the economic system to achieve economic goals of freedom, price stability, equity, security, full employment, and economic growthWhat has occurred in the last two years and how has the government reacted?
- 30. Promoter of National GoalsThe United States is said to have a Mixed Economy or a Modified Private Enterprise Economy