Economic SystemsAn economic System is a set of rules that

govern the answer to the three basic economic questions.

(Rationing Systems)

Traditional Economies•The allocation of

scarce resources stems from ritual, habit, and tradition.

•One from a family of hunters will grow up to be a hunter.

•Everyone knows their place

•New Ideas are rarely accepted.

Traditional Economy

Advantages:

-Everyone knows there role

-You do everything the same way your parents did

Disadvantages:

-Discourages new ideas

-Tendency to punish people who act differently or break the rules

-Lower Standard of living

Command Economies•Scarce resources are allocated

according to a central authority--the government.

•North Korea, Cuba, Former Soviet Union,

•Can be quickly changed.

•Less incentive to work hard, -needs are usually met, but wants may not be.

Command Economy

Advantages:

-Can change direction really quick in a short period of time

(Soviet Union)

-Many health and public services are available to everyone at little or no cost

-Access is better than none

Disadvantages:

-Does not meet the wants of the consumers

-No incentive to work hard

-Large group of decision makers

Market Economies

•People and firms act in their own best interest to answer the basic economic questions

•The market is an arrangement that allows buyers and sellers to come together in order to trade goods and services

Market Economies•People’s

decisions act as votes.

•The votes (dollars spent) are counted by producers and then they know WHAT to produce.

Market Economy Advantages:

-Over time it can adjust to change

(gas shortage in 70’s)

-High degree of individual freedom

-Small degree of Gov. interference

Disadvantages:

-Does not provide for the basic needs for everyone in society

-Does not provide enough of the services people value

-Uncertainty that workers face when there is change

•Many of the largest and most prosperous economies in the world are market economies.

•Japan, South Korea, France, Britain, Canada, United States, etc...

Market Economies

Market Economy•Some do without.

•uncertainty about change.

•markets can fail if

•competition is eliminated

•resources cannot be moved relatively easily

•consumers do not have information

Mixed Markets•All markets are to some degree a

mixed market.

Government

Government

Mixed Markets

•How can our market be mixed?

-Give me an example of some concepts from our other systems that our economy uses today?

How do we evaluate economic

performance•Economic performance is the

evaluation of an economy to determine if the system is meeting most if not all of our needs.

Social and economic Goals

• Economic freedom

• Economic Efficiency

• Economic Equity

• Economic Security

• Full Employment

• Price Stability

• Economic Growth

• Future Goals

•You have the choice to shop and do business where your please

•Based on your specific consumer tastes.

•No one tells you where you have to buy your products

Economic Equity

•Equal pay for Equal Work!

- You cannot discriminate on the basis of age, sex, race, religion, or disability

Also- false advertising, lemon laws

Economic Security

•We desire protection from adverse economic events (layoffs, illness)

- Social Security- disability and retirement benefits

Full Employment

•We want our economy to have as many jobs as possible

1.If no job they will not be producing goods and services for others

2. They cannot support themselves or their families

Price Stability

•Stable Prices!

- When inflation occurs, people need more money to pay for the things they need

- This hurts people on fixed incomes

(prices increase but their pay is the same)

This is bad because it can discourage economic activity

Economic Efficiency

•We know that resources are scarce, so they must be used wisely!

(If wasted fewer goods and services will be available)

So we must make smart decisions so the benefits gained are greater than the cost

•Turn to page 44 and complete the section assessments 1,3-6

•How our economy works

•The freedom to enter into a transaction in the market (you don’t have to buy if you don’t want to)

•Profit Motive- everyone enters into a business hoping to make money.

•How?- By offering quality products at a low competitive price

•It benefits you, the consumer, because more quality, constantly improving products are available at reasonable prices.

•Consumers have the power in a market economy

•You decide what products are bought and sold based on your shopping trends

•Consumer Sovereignty- The consumer rules the market. “The consumer is always right.”

•Highly debated.

•FDA

•Monopoly break-ups

•Income Redistribution

Forms of Business Organizations

I. Sole Proprietorship- This is a business owned and run by one person

(Lemonade Stand)

Advantages:

- Ease of Start up

- Ease of management

- Owner enjoys all the profit

- Does not have to pay separate taxes

- Psychological Satisfaction

Forms Cont.II. Partnership- A business jointly owned by two or more people

(ex- Law firm)

2 types- General- all partners are responsible for the money and operation

-Limited- At least one partner is not active in the daily running of the busines

Advantages:

-Ease of Establishment

-Ease of management

Partnership continued

- Lack of special Taxes

-Partnerships can usually attract financial capital more easily

-Slightly larger in size which makes it more efficient

-Can attract the top talent to their firms

Forms Cont…III. Corporation- is a form of business organization recognized by law as a separate legal entity, but has all the rights of an individual.

1.Must obtain a charter to form a corporation

2.Then your charter specifies the amount of stock you can issue.

-2 types of stock-

Common- Basic ownership of a corporation

Preferred Stock- represents non-voting ownership of a corporation.

Advantages:

-Ease of raising Financial Capital

-Can hire professional managers to run

-Limited Liability to owners

-Unlimited Life

Business Growth and Expansion

I. There are 2 ways that a business can grow!

1.Reinvesting some of its profits

2.By engaging in a Merger

Reinvesting!

A.Most Business’s use some of their revenue to invest in factories, machinery, and new technology

- A business must first have enough cash flow to reinvest

Mergers!

A.When Firms merge one must give up its legal identity

Reasons to merger include- cannot grow fast enough with what they make, sometimes it just makes sense to be bigger.

Mergers cont…..

•Types of mergers include-

- Horizontal merger- takes place when two or more firms produce the same product join forces

- Vertical merger- two firms or more involved in different steps of manufacturing or market join forces