ECONOMIC SYSTEMS & DECISION MAKING
Chapter Two
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
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
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
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
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
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
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
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
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
Section 2: Evaluating Economic Performance
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
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
Economic and Social Goals
Control Inflation: Rise in general level of prices-workers need more $$ to pay for food, clothing, shelter;
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…
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?
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
Capitalism and Free Enterprise
A free enterprise economy has 5 important characteristics:
Economic freedom Voluntary exchange Private property rights Profit motive Competition
Economic Freedom People have the
right to choose: Occupation Employer Self-Employed
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
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
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
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
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
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
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
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
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
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?
Promoter of National Goals
The United States is said to have a Mixed Economy or a Modified Private Enterprise Economy