Ch. 2: Economic Systems and Decision Making. Traditional Economies Allocation of scarce resources...
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Transcript of Ch. 2: Economic Systems and Decision Making. Traditional Economies Allocation of scarce resources...
Ch. 2: Economic Systems and Decision Making
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• Ex?• North Korea, China, former Soviet Union,
Cuba
Command Economy: Advantages
• 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
• 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…
• 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
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
• 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
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
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
Competition 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