Economics Chapter 2 Economic Systems Chapter 2 Economic

Economics Chapter 2 Economic Systems

Chapter 2: Economic Decisions 2. 1 Economic Systems 2. 2 Evaluating Economic Performance 2. 3 Capitalism and Economic Freedom

2. 1 Economic Systems ACOS: 2. Compare the development and characteristics of the world’s traditional, command, and market economies.

2. 1 Economic Systems Daily Objectives: �Describe the characteristics of the traditional, command, and market economies. �Explain the advantages and disadvantages of the traditional, command, and market economies.

2. 1 Economic Systems �Traditional Economies �Command Economies �Market Economies �Three Requirements for a Market Economy

Economic Systems �An economy is “organized way of providing for wants and needs of their people. ” �Most countries have a traditional, command, or market economy. Joseph Stalin

Traditional Economies �The distribution of scarce resources is determined by ritual, habit, or custom. �Many indigenous peoples like the Australian Aborigines utilize the traditional economy.

Traditional Economies �The biggest advantage is that each person knows what roles to play. �The problem is that it discourages creativity and new ways of doing things. �This results in a lower standard of living.

Command Economies �A central authority answers the three basic questions in a command economy. �Examples include Cuba, North Korea, and the former Soviet Union. �The strength of this system is that it can adjust to needs quickly.

Command Economies �Command economies have several disadvantages: ◦ It does little to address the wants of consumers. ◦ It does not give people incentive to work hard. �Most workers receive similar pay. (Ex: doctors and janitors) �Workers are often assigned jobs below their potential.

Command Economies ◦ A large bureaucracy is necessary to make decisions. �This results in inefficiency. �This increases production costs. ◦ It does not have flexibility to adjust to little issues. ◦ Creativity is limited, and little incentive is offered to workers.

Market Economies �People and firms answer the three basic questions. �People “vote” for what they want with their money. �Examples include the U. S. , Canada, Japan, South Korea, Britain, and other Western European nations.

Market Economies �The ability to adjust to change over time is a strength of this system. (ex: gas shortages in 1970 s) ◦ Change is not discouraged like the traditional economy. ◦ Change is not delayed or forced on people as in a command economy.

Market Economies �Another strength of the market economy is its emphasis on individual freedom. �Government influence is kept to a minimum. �Another strength of the market economy is the fact that decision making is made by the people themselves.

Market Economies �This results in a variety of goods and services. �Customer satisfaction is much greater in a market economy.

Market Economies �The market economy has some disadvantages as well. ◦ It does not provide for the basic needs of everyone in society. ◦ It is unable to provide some services efficiently. (ex: national defense) ◦ Uncertainty about the future may also be a weakness. (ex: unemployment)

National Defense

Unemployme nt

Three Requirements for a Market Economy �Competition is necessary. �Resources must be free to change to other activities. (ex: worker changing job) �Consumers need sufficient information to make wise economic decisions.

2. 2 EVALUATING ECONOMIC PERFORMANCE

ACOS: 2. COMPARE THE DEVELOPMENT AND CHARACTERISTICS OF THE WORLD’S TRADITIONAL, COMMAND, AND MARKET ECONOMIES.

Objectives: �Describe the basic economic and social goals used to evaluate economic performance. �Evaluate the trade-offs among economic and social goals.

2. 2 Evaluating Economic Performance �Seven Economic and Social �Economic Freedom �Economic Efficiency �Economic Equity �Economic Security �Full Employment �Price Stability �Economic Growth �Other Goals and Choices �Internet Resources Goals

Seven Economic and Social Goals �Economic Freedom �Economic Efficiency �Economic Equity �Economic Security �Full employment �Price stability �Economic Growth

Economic Freedom �This goal promotes an individual’s ability to choose careers and how to spend money. �It also allows businesses to choose where and how to produce their goods and services.

Economic Efficiency �This goal seeks to be resourceful with scarce factors of production. �It also reflects the desire that benefits outweigh the costs of production.

Economic Equity �This social goal seeks fairness among workers. �Minimum wage laws reflect this goal.

Economic Security �This social goal seeks to provide for the unhealthy, elderly, and unhealthy. �Social Security is a federal program that provides disability and retirement benefits for working people.

Full Employment �This goal states that those with the necessary skills and are willing to work have jobs. �This does not mean all adults have jobs.

Price Stability �This goal seeks a consistent level in prices of goods and services. �Inflation is a rise in the general level of prices.

Price Stability �People with a fixed income have difficulty dealing with inflation. �Interests rates usually rise with inflation. �This makes it harder for businesses to borrow and spend money.

Economic Growth �Growth allows people to enjoy more goods and services. �Economic growth is necessary for nations with growing populations.

Other Goals and Choices �Societies may gain new goals. (ex: clean environments) �Societies may face trade-offs to achieve certain goals. �They must

Internet Resources �http: //www. bls. gov/oco/

2. 3 CAPITALISM AND ECONOMIC FREEDOM

ACOS: 2. COMPARE THE DEVELOPMENT AND CHARACTERISTICS OF THE WORLD’S TRADITIONAL, COMMAND, AND MARKET ECONOMIES.

2. 3 Capitalism and Economic Freedom Objectives: �Explore the characteristics of a free enterprise system. �Describe the role of the entrepreneur, the consumer, and government in a free enterprise economy.

2. 3 Capitalism and Economic Freedom �Capitalism �Five Characteristics of a Free Enterprise Economy �Economic Freedom �Voluntary Exchange �Private Property Rights �Profit Motive �Competition � The Role of the Entrepreneur � The Role of the Consumer � The Role of Government

Capitalism �Capitalism is “a system in which private citizens own the factors of production. ” �The American economy is a free enterprise system. �The phrase free enterprise refers to an “economy in which competition is allowed to flourish with a minimum of government interference.

Five Characteristics of a Free Enterprise Economy 1. 2. 3. 4. 5. Economic Freedom Voluntary Exchange Private Property Rights Profit Motive Competition

Economic Freedom �People choose where they want to work. �Businesses can charge what they want. �Both are free to risk success or failure.

Voluntary Exchange �Voluntary exchange is the act of buyers and sellers freely and willingly engaging in market transaction. �Buyers and sellers both benefit from the sales.

Private Property Rights �Private property refers to tangible and intangible items. �It gives people the incentive to work and improve their standard of living. �People take better care of their own property.

Profit Motive �People become entrepreneurs hoping to make a profit. �Entrepreneurs take risks hoping to make money. �The profit motive is the “driving force that encourages people and organizations to improve their material well-being. ” Steve Jobs and the IPad 2

Competition �Competition is “the struggle among sellers to attract consumers while lowering costs. ” �It results in the production of goods and services at the lowest cost and distribution to consumers who are able and willing to pay.

The Role of the Entrepreneur �Entrepreneurs start new businesses. �Many business attempts fail. �Very few become overwhelmingly successful as Bill Gates or Walt Disney. �Despite high risks, people still seek success.

The Role of the Entrepreneur �Everyone benefits when an entrepreneur is successful. �Other firms are attracted to the industry created by successful entrepreneurs. �This results in: ◦ ◦ ◦ New products, Greater competition, more production higher quality lower prices for consumers.

The Role of the Consumer �Consumers are sovereign in the free market economy because they determine the success of a good or service. �IPods, Kindles, and cell phones are successful because buyers want them.

The Role of the Consumer �Celery-flavored Jell -O, chewable toothpaste tablets, and toaster-ready bacon have all failed because the public did not purchase them. �Consumers “vote” for what by how they spend their money.

The Role of Government �Government plays five roles in the economy. �As a protector, government passes and enforces laws to prevent consumers and workers from being abused. (Ex: lemon laws, FDA) �As a provider, government supplies goods and services like national defense and education.

The Role of Government �As a consumer, government uses factors of production in order to provide. �Government has become the second largest consuming unit in the economy, second only to the consumer sector.

The Role of Government �As a regulator, government works to ensure fair competition. �As a promoter of national goals, government influences the economy to achieve the seven basic economic and social goals. �The U. S. has a mixed economy (modified private enterprise economy) where some government control is present.

TEST TOMORROW!

CHAPTER 2 REVIEW QUESTIONS

Chapter 2 Review Questions 1. 2. 3. 4. 5. 6. Describe a traditional economy. Describe a command economy. Describe a market economy. Describe the advantages and disadvantages of a traditional economy. Describe the advantages and disadvantages of a command economy. Describe the advantages and

Chapter 2 Review Questions Describe the basic economic and social goals used to evaluate economic performance. 8. Evaluate the trade-offs among economic and social goals. 9. Briefly describe the five characteristics of a free enterprise system. 10. Describe the role of the entrepreneur in a free enterprise system. 11. Describe the role of the consumer in a free enterprise system. 12. Describe the role of government in a free enterprise system. 7.