Economic Systems and Goals

SRVHS Economics

Fundamental Problem

Scarcity: Unlimited needs and wants, limited resources

Choices Efficiency: minimizing costs of production =

most out for least in Can’t make anyone better off w/o making someone

worse off Efficient = “good”

Danger: accept this, and lots of unintended consequences accrue

E.g. efficient not “fair” efficient if I have all the money: can’t make you better off w/o making me worse off

The Three Economic Questions What goods and services should be produced?

Guns vs. butter/capital vs. consumer

How should these goods and services be produced? How combine factor resources/factors of

production (land, labor, capital, entrepreneurial ability)

Who consumes these goods and services? US: Distribution of income: factor payments

[wages, rent, interest, profit (for entrepreneurs)]

Economic Goals Efficiency

Making the most of scarce resources Freedom

Freedom to make own choices Security and Predictability

Products available, payments made, safety net Equity

Fair distribution of wealth Growth and Innovation

Search for higher standard of living Other

Environmental protection, global domination, etc.

Economic Systems

Traditional Tradition determines economic answers

Market (free market / capitalist) Individuals answer based on exchange

Centrally Planned (command) Central authority answers questions

Mixed Combination traditional, market, and

command (US)

American Free Enterprise

An economic system that permits business to operate with limited government involvement.

Features of Free Enterprise

Economic Freedom Competition Private Property Contracts Self-interest Voluntary Exchange Profit Motive

Competition

Producers have the right to engage in rivalries to gain business (market share).

This competition should keep prices low for consumers and stimulate innovation. In reality, capitalism tends toward

monopoly and oligopoly, with one or a few companies dominating a market (Microsoft, Pepsi and Coke).

Private Property Individuals and businesses have the

right to buy and sell as much property as they want. Property owners may prohibit others from using their property.

These rights are defined and defended by the government (see Amendment 13). Sometimes, however, the needs of the society outweigh those of the individual and the government has the right of eminent domain (Amendment 5).

Contracts

Individuals and businesses have the right to make agreements (written or oral) to buy and sell goods, agreements that are enforceable by law.

This is also known as the rule of law and is defined and enforced by the government (see the Judicial branch).

Voluntary Exchange

Consumers and producers may freely buy and sell goods when the opportunity costs of such exchanges are worthwhile.

Both parties expect to gain from the exchange. Does not mean that they do gain or that they gain equally. Is it “voluntary” that you have to work or

starve? Yes, according to economists.

Profit Motive

Profit: the gain that occurs during financial dealings.

Profit is a powerful incentive that leads entrepreneurs and businesses to accept the risk of business failure.

Profit motive is part of the idea of the invisible hand, which also holds that individual self-interest leads to social well-being.

The profit motive is mitigated somewhat by taxes on high incomes, although many businesses avoid paying their full share through “creative accounting” and moving off-shore.

Government’s Role in the Free Enterprise System

Often the invisible hand is not enough: government must step in to provide for the public interest.

The actions the government takes are called public policy, are influenced by the public through elections, campaign contributions, political activism, etc.

Public Policy

The Government primarily provides: Regulation Safety Net Public Goods Stability

Regulation

The government attempts to control the quality and nature of goods and services that affect the well-being of the public:

FDA (Food and Drug Administration) EPA (Environmental Protection Agency) OSHA (Occupational Safety and Health

Administration) FCC (Federal Communications Commission) EEOC (Equal Employment Opportunity

Commission)

Safety Net

The Federal government has been called an insurance company with a side line in national defense and education.

The major expenditures of the Federal Government are for Medicare and Medicaid (medical assistance for the poor and elderly), and Social Security (retirement insurance).

Welfare programs designed to lift the poor above the poverty threshold represent a very small percentage of government expenditures. Most welfare programs of this type are done

through cash transfers such as through TANF (Temporary Assistance for Needy Families)

Public Goods

Because of the free rider problem the government must step in and provide certain goods and services that benefit the entire society but no individual wants to pay for: national defense, education, dams.

These goods and services are known as public goods.

Public Goods

Characteristics: It is inefficient or impractical 1) to make

consumers pay individually and 2) to exclude nonpayers.

Any number of consumers can use them without significantly reducing benefits to any single consumer (highways, parks, national defense).

Public Goods

The public sector must step in when the private sector fails to provide a good because

1) the benefit to each individual is less than the cost that each would have to pay if it were provided privately

2) the total benefits to society are greater than the total cost

Stability

The government regulates the money supply in order to combat inflation while also having steady growth.

This is done largely through the Federal Reserve System.

The government tracks growth of the economy by measuring gross domestic product (GDP).