1. Economics & Finance Chapter 2 Economic Systems

2. Chapter 2 Section 1Terms:  Economy/Economic System  Organized way of providing for the wants and needs of the people in a society

3. Chapter 2 Section 1Terms cont. Three types of economic systems:  Traditional Economy  Nearly all economic activity stems from ritual, habit, or custom.  Roles of individuals are defined by custom so they lack the right to make decisions based on their wants and needs.  Ex: The Inuits of northern Canada up until the 1800’s

4. Three types of economic systems cont:  Advantages of Traditional System:  Each individual knows their role  Little uncertainty of “what to produce”  Hunters hunt, women raise children, cook and sew  Little uncertainty of “how to produce”  Everything done the same from generation to generation.  “ “ for “whom to produce”  Determined by customs and traditions  Life is generally stable, predictable, and continuous.

5. Three types of economic systems cont:  Disadvantages of Traditional System:  Discourages new ideas and methods  Punishes those who “act differently”  Fishing with a pole versus a spear would be frowned upon or chastised.  Lack of progress  Leads to lower standard of living

6. Three types of economic systems cont:  Command Economy  Central authority makes most of the WHAT, HOW, and FOR WHOM decisions.  Economic decisions made by government  People have little, if any influence  Exemplified by a Dictatorship:  Former Soviet Union  Cuba  North Korea  Germany from 1936 - 1945

7. Three types of economic systems cont:  Advantages of Command Economies:  Can change directions drastically and in short period of time.  Soviets changed from agricultural based economy to industrial in just a few decades.  “Central Planning Agency” shifted resources on a massive scale.  Consumer goods ignored in favor of military, factories, infrastructure.  Shortage of male labor was dealt with by forcing women to manual labor.  Little uncertainty on part of the people.  Your career, job status, and employment period are dictated by the state  Minimum Education, Health and Public Services provided at little or no cost to population

8. Three types of economic systems cont:  Disadvantages of Command Economies:  Not designed to meet the “WANTS” of the consumer.  Autos, home appliances, entertainment may all be deemed unnecessary by the government.  Housing needs, design and amenities are determined by government’s perception of “NEED”.  No incentive to work hard and produce more. (“They pretend to pay us, and we pretend to work”)  Workers of different skill and responsibility levels receive similar wages.  People rarely lose job regardless of quality of work.  Quotas based on arbitrary measures:  Electric motor weight quota led to workers making the world’s heaviest electric motors  Quality and efficiency suffered greatly

9. Three types of economic systems cont:  Disadvantages of Command Economies cont:  Requires large decision-making bureaucracy.  Glut of clerks, planners, and administrators needed to operate system.  Decisions can’t be made until consultation with large number of people and extensive paperwork.  Slows process and raises cost of production  Lacks flexibility to deal with minor, day-to-day problems.  Size of bureaucracy discourages even the smallest adjustments  Inefficiencies continue until systems collapses under its own weight

10. Chapter 2 Section 1Terms cont. Three types of economic systems:  Market Economies  People and Firms act in their own best interests to answer: WHAT, HOW and FOR WHOM.  Arrangement allows buyers and sellers to come together in order to exchange goods and services.  Might be in a specific location: Farmer’s Market, Bulletin Board, Internet, or Mall  People’s decisions act as “votes” for that product or service  Based on “dollar votes”, producers know what, how much and for whom to produce.

11. Three types of economic systems cont:  Advantages of Market Economies:  Over time, it can adjust to change.  During gas shortages of 1970’s, consumers reduced demand for large, gas-guzzling autos.  Auto makers began to produce smaller fuel efficient cars  When gas prices fell in the `80’s, trend began to reverse (SUV’s came on the scene) and auto makers again adjusted production.  Change is neither prohibited or discouraged.  Change is neither delayed nor forced upon people.

12. Three types of economic systems cont:  Advantages of Market Economies cont:  High degree of individual freedom  Producers make WHAT they think will sell.  Producers decide HOW to make it (most efficient manner possible).  Consumers spend their money on the goods and services they PREFER.  Consumers choose WHERE and WHEN they want to work.  Consumers decide how they will invest further in their own education and training (choose career).

13. Three types of economic systems cont:  Advantages of Market Economies cont:  Relatively small degree of government interference.  Exceptions: National Defense, Environmental Protection, National Highways etc.  Generally allows markets to determine what and how much is needed.  As long as COMPETITION exists, the market economy tends to take care of itself.

14. Three types of economic systems cont:  Advantages of Market Economies cont:  Decision making is decentralized  Billions to trillions of economic decisions are made daily by buyers and sellers in the marketplace.  Collectively, these decisions direct scarce resources into uses consumers favor.  Everyone has a voice through their “dollar votes”  Incredible Variety of goods and services.  If buyers exist, it will be produced  High degree of consumer satisfaction.  Choices are varied and fulfilled for all niches regardless of percentages

15. Three types of economic systems cont:  Disadvantages of Market Economies:  Does not provide for basic needs of everyone  Health care for poor (government must step in through programs such as Medicaid)  Does not provide enough of certain services valued highly by people:  Universal Education, National Defense, Comprehensive Health care etc. (again, government steps in to insure these vital services are universally available)  Difficult for private markets to “sell” these services  Paid for through taxes and service/use fees

16. Three types of economic systems cont:  Disadvantages of Market Economies cont:  Relatively high degree of uncertainty that workers and businesses face as result of change  Companies may move or downsize (Ford)  Competition may drive them out of business  For a Market Economy to succeed:  Markets must be reasonably competitive  Resources must be reasonably free to move from one activity to another  Workers need freedom to change jobs  Producers free to produce in the most efficient way  Consumers need access to adequate information to weigh the alternatives and make good choices.

17. Three types of economic systems cont:  Disadvantages of Market Economies cont:  When markets fail, some businesses become too powerful and compensation can be higher than is justified by their productivity (MONOPOLY)  Government regulates Monopolies to ensure competition in the markets  Government regulates resources to ensure freedom of movement  Government regulates disclosure of information to ensure consumers make informed decisions

18. End Chpt 1 Sec 1

19. Chapter 2 Section 2 Evaluating Economic Performance:  Economic and Social Goals:  Economic Freedom  People choose their own occupations, employers, and use their own money as they choose  Economic Efficiency  Recognizing that resources are scarce, factors of production are used wisely  Economic decision making must be efficient so that gains are greater than costs  Economic Equity

20. Chapter 2 Section 2 Evaluating Economic Performance cont:  Economic and Social Goals cont:  Economic Security  Social Security  Full Employment  Price Stability  Inflation  Fixed Income

21. Chapter 2 Section 2 Evaluating Economic Performance cont:  Economic and Social Goals cont:  Economic Growth  Future Goals

22. Chapter 2 Section 2 Evaluating Economic Performance cont:  Trade-Offs

23. Chapter 2 Section 2 Activity:

24. Chapter 2 Section 3 Capitalism and Economic Freedom

25. Chapter 2 Section 3 Terms:  Capitalism  Free Enterprise  Voluntary Exchange

26. Chapter 2 Section 3 Terms:  Private Property Rights  Profit  Profit Motive

27. Chapter 2 Section 3 Terms:  Competition  Consumer Sovereignty  Mixed Economy

28. Chapter 2 Section 3 Terms:  Modified Private Enterprise Economy

29. Competition and Free Enterprise  Economic Freedom  Voluntary Exchange  Private Property Rights  Profit Motive  Profit  Profit Motive  Competition

30. Role of the Entrepreneur

31. Role of the Consumer  Consumer Sovereignty

32. Role of Government  Protector  Provider  Consumer  Regulator  Promoter of national Goals  Mixed Economy  Modified Private Enterprise Economy

33. Chapter 2 Section 3 Activity