Economic Objectives and Economic Systems

AS Economics

Aim Understand economic objectives and

economic systems.

Objectives Define different agents’ objectives in an

economy. Describe how these objective are competing. Analyse different types of economic systems.

Aims and Objectives

Economic ObjectivesEconomic Objectives1.

Consumers

List the things you want from

an economy, and things you need from an

economy.

2. Workers

List the things you want from

an economy, and things you need from an

economy.

3. Firms

List the things you want from

an economy, and things you need from an

economy. You may wish to

consider profits,

investments.

4. Governme

nts

List the things you want from

an economy and the

things you needs from

an economy. E.g. Taxes

Consumers

• Maximise economic welfare.

• Range of choice of products and services

• Competitive environment

Workers

• Maximise gains from working. I.e. wages

• Benefits such as company cars

• Good working conditions.

• Maximise economic welfare.

Firms

• Maximise profits.

• Maximise returns on investment.

Governments

• Objectives not always shared with all economic agents.

• Political objectives influence decisions.

• Allocate resources efficiently.

A new high speed train line is planned to be built from Leeds to London.

It would mean the creation of a new line and state of the art station which would include a new shopping centre. However it would result in the demolition of the villages of Barton Le Clay and Toddington.

New High Speed Train Line

In groups of economic agents, form an argument considering your objectives, as to whether or not this should go ahead.

Consider residents of the areas opinions.

Economic agents often have different, conflicting opinions and objectives.

Decisions about the allocation of resources will need to take into account these objectives and conflicts.

Whether the government intervenes to allocate resources depends on the economic system.

Conflicts Between Agents

Berlin Wall

1989 Signalled the end of Communism

Resources are allocated by the command mechanism (i.e. the government).

All decisions about what and how much and who should produce goods/services are taken by government.

Only exist in a dictatorship government. Consumers had to queue to buy goods,

whose prices were fixed by governments, resulting in shortages and poor quality goods.

Command economies broke down. Still exist: China, North Korea, Cuba.

Command/Planned Economy

Resources are allocated by the price mechanism and market forces.

Allocates scarce resources among competing uses.

Market could be anything from a street market, to buying goods and services online, to markets such as eBay!

One example would be labour, exchanged for cash, as different prices.

Market Economy

Prices and ProfitsPrices and Profits in Free Market Economy

Scarce resources achieve high prices. E.g. Diamonds

Prices and profits have three key functions:

1. Incentive function2. Rationing function3. Signalling function

Prices and Profits

Prices and Profits in Free Market Economy

When prices rise: Consumers tend to ration

their demand.

Sends a signal to producers that there is a scarcity or

shortage.

Creates an incentive for suppliers to increase supply as more profit is potentially

available.

Prices and ProfitsPrices and Profits in Free

Market Economy

When prices fall: Consumers increase their

demand, end to rationing.

A signal is sent to producers that there is too much

supply and scarcity falls.

Creates an incentive for producers who see profits falling to leave the market.

As oil prices increase, motorists would spend more money on petrol and be tempted to ration the amount of journeys, cutting demand for petrol.

Oil companies are incentivised to increase supply by developing oil fields.

High market price has signalled new firms should enter the markets.

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Cuban Economy, changing for the better?

What were the problems being experienced in Cuba’s command economy?

Why might small changes be happening to Cuba’s economy?

What may be the benefits and drawbacks of Cuba changing from a command to a market economy?

Talking Points