Economic Systems and Decision Making Economic System All

Economic Systems and Decision Making

Economic System • All societies have an economic system of some form. • An organized way of providing for the wants and needs of their people.

Traditional Economies • The allocation of scarce resources, and nearly all other economic activity, stems from ritual, habit, or custom. – Habit and custom also dictate most social behavior. – Roles are defined by customs of elders or ancestors. • Example: Inuit tribe teaching children to hunt and fish.

Command Economy • Central authority makes most of the what, how, and for whom decisions. – Government makes the decisions.

Market Economy • People and firms act in their own best interests to answer the what, how, and for whom questions. – Allows buyers and sellers to come together in order to exchange goods and services. – People’s decisions act as “votes. ” • Example: Decision to buy a product (Dollar vote)

Evaluating Economic Performance • Economic and Social Goals – Freedom – Efficiency – Equity – Security – Employment – Price Stability – Growth

Price Stability • Goal is to keep prices stable. – Inflation: A rise in the general level of prices. – Fixed income: An income that does not increase even though prices go up.

Capitalism and Economic Freedom • Voluntary exchange: The act of buyers and sellers freely and willingly engaging in market transactions. • Private property rights: Allows people to own and control their possessions as they wish.

Competition • Possible because private individuals, acting as entrepreneurs, own the factors of production and have the freedom to produce the products they think will be the most profitable.

Role of Government • • Protector Provider and Consumer Regulator Promoter of National Goals