Chapter 2 Making Decisions

1. Chapter 2Making Decisions These slides supplement the textbook, but should not replace reading the textbook

2. What is an economic system? A set of social institutions and mechanisms organized to answer the three economic questions

3. What are the three questions? Who gets what and how much?

4. What is acommand economy? An economic system characterized by public ownership of resources and centralized economic planning

5. What ispure capitalism? An economic system characterized by private ownership of resources and the use of prices to coordinate economic activity in unregulated markets

6. What is amixed capitalist economy? An economic system characterized by private ownership of some resources and public ownership of others; some markets are regulated, others are not

7. What is American Capitalism? • production is privately owned • profit motive • private decisions in a free market

8. What is the Full Employment Act of 1946? The Federal government was mandated to do everything in its authority to achieve full employment, it set goals

9. What were the objections to the Full Employment Act of 1946? • business cycles are natural • lag effects • difficulty in forecasting

10. Why have we modified the free market system? A free market cannot provide us with everything we need

11. 8 basic goals? • full employment • stable prices • efficiency • fairness • growth • less pollution • economic freedom • economic security

12. What is the Full Employment and Balanced Growth Act of 1978? Among other things the Federal Reserve was mandated to do everything in its authority to achieve full employment and stable prices

13. Conflicting goals? Money is scarce, the more for government the less for private use, we always have opportunity costs

14. What happens when we modify the system too much? Communication between its different parts become blurred and the system falters

15. What is rent seeking? Businesses financially support politicians for the purpose of influencing legislation

16. What is crony capitalism? A system where success in business depends on close relationships between big business and government

17. What is moral hazard? Occurs when businesses are insulated from risk and therefore are encouraged to take undo risks

18. What does private gains but social losses mean? When big business is bailed out of a bad situation the tax payer picks up the tab

19. Where does the money come from to pay for business losses? The government gets money from three sources: taxes, borrow, or creates

20. Where does the money come from to pay for business losses? Much of the money has been borrowed, our national debt increased 40% in 2010!

21. If the government borrows money do we pay for it later ? A dollar spent today is paid for today regardless of where the money comes from

22. What happens with a more intrusive government and higher taxes? The free market system breaks down

23. What happens when we chose between less government and more government? We incur an opportunity cost

24. What isabsolute advantage? The ability to produce something with fewer resources than other producers use

25. What iscomparative advantage? The ability to produce something at a lower opportunity cost than other producers face

26. What is adivision of labor? The production of a single good into separate tasks in which people specialize

27. What is aspecialization of labor? Focusing an individual’s efforts on a particular product or a single task

28. How does the specialization of labor increase productivity?

29. Allows workers to develop more experience at a particular task • Takes advantage of individual natural abilities • Permits the introduction of labor-saving machinery • Reduces time required to shift between tasks

30. Who are the decision makers? • households • business • government • foreign

31. END