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Chapter 2: Economic Systems and Decision Making GOALS 1) Identify different economic systems 2) Evaluate Economic Performance 3) Define Capitalism and Describe Economic Freedom
Three Basic Economic Questions What to produce? Because of scarcity, each choice to produce comes with an opportunity cost. How to produce? How will a society use their resources to make goods? For Whom to produce? Who consumes the products? Are we making capital goods or consumer goods?
Evaluating Economic Performance General Economic goals translate from nation to nation. There are six goals. 1) Economic Freedom- people want to make their own decisions about what to buy, what job to have, whom to marry – this can help build patriotism. 2) Economic Efficiency- resources must be used wisely so everyone can get what they need and most of what they want.
Economic Goals of the US 3) Economic Equity- discrimination should not exist in the workplace, or in products. People should get a “fair share of the pie” 4) Economic Security- people want protection from adverse economic events like recession and unemployment – this is the concept of a “safety net”.
Economic Goals of the US 5) Economic Growth and Employment -the economic system should provide as many jobs as possible and should improve the standard of living. 6) Price Stability- prices should remain about the same with little or no inflation- a rise in the general level of prices, this protects those on fixed incomes
Types of Economic Systems Economy/economic system- an organized way of providing for the wants and needs of a people. There are four main types: Traditional Command Market Mixed
Crash Course – Types of Economies
Continuum of Economies
Traditional Economy Traditional Economyeconomic activity stems from ritual, habit, or custom, roles are defined by customs of elders Ex. – tribal communities
Traditional Economy Advantages (+) Community works together to support the entire group Everyone knows their role and what to produce Everyone knows how to produce For Whom question is answered by customs and tradition
Traditional Economy Disadvantages (-) Discourages new ideas and new ways of doing things Those who act differently than their roles are punished – gender roles are clearly established (men = hunters, women = gatherers) Lack of change and progress leads to low standard of living
Command Economies Command/ “Centrally Planned” economy - the central (government) makes the economic decisions Government owns the land the capital (instead of the households) and control all aspects of labor. Ex: North Korea, Cuba, former USSR, China is in transition
Command (Centrally Planned) Economies Centrally planned economies are associated with socialism and communist governments. Socialism – social and political belief that wealth should be distributed evenly through a democratic society. Communism – a system of government where all of the power and economic decision making resides with the central government. Unlike socialists, communists are authoritarian and believe that the government and not the people should make decisions.
Karl Marx & Friedrich Engels Introduced socialist beliefs to the Soviet Union in The Communist Manifesto. After a revolution in 1917, the word communist changed to the meaning we understand today.
Vladimir Lenin Led revolution in Soviet Union in 1917 Introduced central planning in 1920 s which continued until the end of the Cold War. Soviet planners wanted to build national power and create the best community in the world. Agriculture (collective farms) Industry (defense oriented) Consumers (low wages, hard to get access to goods)
Command Economy (+) Advantages Economy can change direction drastically in a short period of time Health and public services are available to everyone at little or no cost
Command Economy (-) Disadvantages not designed to meet the wants of consumers there is little incentive to work hard (-) a large decision making bureaucracy is required inflexible for day to day problems new ideas, changes, inventions not encouraged
Market Economies Market economies exist because no one nation is entirely self-sufficient. Markets allow us to exchange and mutually benefit from trading. In a market economy: Households and firms act in their own best interest to answer the What, How, and For Whom questions. Consumers decisions (demand) act as “votes” for products and helps to regulate prices. Ex: US, Japan, Great Britain, France, South Korea, Singapore
The Circular Flow Model $ COSTS $ INCOMES FACTOR MARKET RESOURCES INPUTS HOUSEHOLDS BUSINESSES GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION
Adam Smith Observed that people responded predictably to positive and negative incentives. When competition is present, buyers and sellers will work together to get prices and quantities at a point where they agree (equilibrium). Smith’s Invisible Hand Theory supports this – self-interest and competition work together to regulate the marketplace. Also called for restricting the role of government in the economy – wanted to enact lassiez-faire policy “let them do as they please”
Market Economy (+) Advantages Countries can specialize in products that they can make efficiently (comparative advantage) Adjusts well to change High degree of individual freedom Small amount of government interference Decisions about what to produce are not left in the hands of the few, made by many – this is called consumer sovereignty Large variety of goods and services available High degree of consumer satisfaction Incentives drive competition
Market Economy (-) Disadvantages Does not provide for basic needs of everyone in society Does not provide services people don’t value highly Uncertainty faced by workers due to change Can fail if: 1 - there is no competition 2 - resources are not mobile, 3 - consumers have inadequate information
Mixed Economies Many of the goals for the market economies, like the US economy, work against each other, it is impossible to completely balance all of them against each other. Even though many market economies believe in “lassiezfaire”-as society has changed it has become necessary to involve the government. Because of that, “mixed” economies are seen around the globe today.
Mixed Economies Governments in market economies today have to create laws that protect property and enforce contracts. That’s because of: Capitalism- system where private citizens own the factors of production Free enterprise- competition in business is allowed to flourish with minimum government interference Voluntary Exchange- the act of buyers and sellers freely and willingly engaging in market transactions, transactions are only made if the buyer and seller are better off afterwards To ensure that our households and businesses are protected, the 5 th Amendment grants private property protections (eminent domain), as well.
Modified Free Enterprise Mixed economy or modified free enterprise economypeople carry on their economic affairs freely, but are subject to some government interjection and regulation
The Role of the Entrepreneurs organize and manage land, labor, and capital to make profits They are the driving force between economic growth Everyone benefits when the entrepreneur is successful
The Role of the Consumer sovereignty- the customer rules the market Businesses will sell what people want to buy, at the prices they are willing to buy them for, if enough of them don’t like a product it will not be sold
The Role of Government Protector- of consumers, employees, property owner, etc. Provider and Consumer- gives things like national defense, education, welfare, parks, roads, etc. also buys things like any business
The Role of Government Regulator- preserves competition in the marketplace, monitors various business and industries Promoter of National Goals- reflects the will of the majority of the people