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Economics

Economics . Chapter 2: Economic Systems. Survival. The survival of any society depends on its ability to provide food, clothing and shelter for its people. Because all societies face scarcity they must answer the questions of WHAT, HOW AND FOR WHOM to produce. Economic System.

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Economics

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  1. Economics Chapter 2: Economic Systems

  2. Survival • The survival of any society depends on its ability to provide food, clothing and shelter for its people. • Because all societies face scarcity they must answer the questions of WHAT, HOW AND FOR WHOM to produce.

  3. Economic System • Every society has an economic system- an organized way of providing for the wants and needs of their people. • 3 Major Types: • Traditional • Command • Market

  4. Why? • Why does a bride throw her bouquet at her wedding? • Why do you shake hands? • Why do Americans eat turkey on Thanksgiving? • Why do we leave tips in restaurants? • Traditions and customs…

  5. Traditional Economies: • The allocation of scarce resources and all other economic activity stems from ritual or custom. • Individuals are not free to make decisions based on what they want, instead roles are defined by the customs of their elders and ancestors.

  6. Traditional Economies: Examples: • Central African Mbuti • Austrailian Aborigines • Inuits of northern Canada (1800s) Mbuti woman collecting fungi Inuit man in Northern Canada.

  7. Traditional Economies Advantages: • Everyone knows which role to play. • Little uncertainty on what to produce. • Your family hunts, you hunt. • Little uncertainty on how to produce. • You produce like your ancestors did. • For whom- determined by customs and tradition.

  8. Traditional Economics Disadvantages: • Tends to discourage new ideas and ways of doing things. Not much innovation. • Strict roles have a way of punishing people who act differently or break rules. • Lack of progress leads to lower standard of living.

  9. Command Economies • A central authority makes most of the WHAT, HOW, and FOR WHOM to produce decisions. • Government makes most other economic decisions.

  10. Command Economies Examples: • North Korea • Cuba • Until recently: China, Soviet Union

  11. Command Economics Advantages: • It can change direction drastically in a relatively short period of time. Why? • Places like former Soviet Union and Cuba- many health care services are available to everyone at little or no cost. Quality of health care?

  12. Command Economics Disadvantages: • Not designed to meet the wants of consumers (even though many basic needs are provided). • Does not give people the incentive to work hard. • Requires a large decision-making bureaucracy. • Does not have flexibility to deal with minor, day-to-day problems. • People with new & unique ideas find it difficult to get ahead.

  13. Market Economies • People and firms act in their own best interest to answer the WHAT, HOW and FOR WHOM to produce questions.

  14. Market Economies Examples: • United States • Canada • South Korea • Singapore • Germany • France • Great Britain

  15. Market Economies Advantages: • Over time, can adjust to change (high gas prices—smaller cars) • High degree of individual freedom. • Relatively small degree of government interference. (national defense, EPA) • Incredible variety of goods and services available. (only in America) • High degree of consumer satisfaction.

  16. Market Economies: Disadvantages: • Does not provide for the basic needs of everyone in society (young, old, sick). Argument- is that the governments job? • Does not provide enough of the services that people value highly. • Gov’t must provide justice, defense, education and health care. • High degree of uncertainty that workers and businesses face. Job security isn’t as great.

  17. Market Economies Market Failures 3 conditions aren’t met: • Markets must be reasonably competitive. • Resources must be reasonably free to move from one activity to another. • Consumers needs adequate information so they can weigh the alternatives and make wise choices.

  18. Evaluating Economic Performances • There are 7 major social and economic goals in the US. • These are not a list that everyone is aware of, but instead they are inherent in our everyday lives.

  19. 1.Economic Freedom • Ability to choose your own occupation, employer and use of money. • Business owners choose where and how they produce.

  20. 2. Economic Efficiency • Resources are scarce and factors of production must be used wisely. • Benefits must be greater then costs incurred.

  21. 3.Economic Equity • Justice, impartiality and fairness • Equal pay for equal work • Illegal to discriminate in work places based on age, sex, race, religion or disability.

  22. 4.Economic Security • Unemployment benefits for those who lose jobs or cannot find jobs. • Insurance plans • Social Security- disability and retirement benefits • Medicare- health insurance for persons 65 years old or older

  23. 5. Full Employment • Economic system to provide as many jobs as possible so that everyone who desires to work can realize that desire.

  24. 6.Price Stability • Have stable prices • Inflation- rise in general level of prices (hard for people with fixed incomes) • Inflation causes higher interest rates which discourages business spending

  25. 7. Economic Growth • Growth is needed so that people can have more goods and services. • We have unlimited wants and needs.

  26. Trade-offs Among Goals • 1. People have different ideas about how to reach a goal. • 2. Sometimes goals conflict with other goals. (Foreign goods are cheaper, but take away American jobs.) • 3.Higher minimum Wage- raises cost of production.

  27. Capitalism & Free Enterprise • Capitalism- where private citizens own the factors of production. • Free enterprise- an economic system where competition is allowed to flourish with a minimum of government influence

  28. Competition and Free Enterprise: 5 characteristics • 1. Economic Freedom: • People are free to choose their occupation and employer • Work for someone or be self-employed • Businesses free to hire who they want, produce what they want and charge what they want.

  29. Competition and Free Enterprise: 5 characteristics • 2. Voluntary Exchange: • Act of buyers and seller fully and willingly engaging in market transactions

  30. Competition and Free Enterprise: 5 characteristics • 3. Private Property Rights: • Privilege that entitles people to run and control their possessions as they wish • Ownership gives people the inventive to work, save and invest.

  31. Competition and Free Enterprise: 5 characteristics • 4. Profit Motive: • Free to risk your savings • Encourages people to become entrepreneurs • Profit- the extent to which persons or organizations are better off at the end of a period then they were at the beginning.

  32. Competition and Free Enterprise: 5 characteristics • 5. Competition: • The struggle among sellers to attract consumers while lowering costs • Buyers compete to find the best products at the lowest prices.

  33. Role of the Entrepreneur • 1. one of the most important people in the economy • 2. start their own businesses • 3. Many fail- others survive • Few become fantastically wealthy!

  34. Role of the Entrepreneur • 4. When an entrepreneur is successful, everybody benefits. • Entrepreneur- profits • Workers- jobs • Consumers- new and better products • Gov’t- higher level of economic activity= taxes • Attracts others into the business

  35. Role of the Consumer • Have the power in the economy because they determine which products are ultimately produced. • Consumer Sovereignty- rule of the market “the customer is always right”.

  36. Role of the Government • Protector: • Enforces laws, such as : false and misleading advertising, unsafe food & drugs, environmental hazards and unsafe automobiles. • Enforces laws against abuses of individual freedoms, discrimination.

  37. Role of the Government • Provider and Consumer: • Defense services- national • Educations and welfare- state • Parks and libraries- local • Government is a consumer too; second largest consuming unit in the economy.

  38. Role of the Government • Regulator • Preserving competition in the marketplace • Oversees interstate commerce, communications, banking and nuclear power

  39. Role of the Government • Promoter of National Goals • Reflects the will of the majority • Social Security, Child Labor laws, Minimum wage • Mixed economy or modifies private enterprises • Some government intervention and regulation

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