Economic Objectives and Economic Systems

1. Economic Objectives and Economic Systems AS Economics

2. Aims and Objectives Aim Understand economic objectives and economic systems. Objectives Define different agents’ objectives in an economy. Describe how these objective are competing. Analyse different types of economic systems.

3. Economic Objectives

5. New High Speed Train Line • In groups of economic agents, form an argument considering your objectives, as to whether or not this should go ahead. • Consider residents of the areas opinions. A new high speed train line is planned to be built from Leeds to London. It would mean the creation of a new line and state of the art station which would include a new shopping centre. However it would result in the demolition of the villages of Barton Le Clay and Toddington.

6. Conflicts Between Agents Economic agents often have different, conflicting opinions and objectives. Decisions about the allocation of resources will need to take into account these objectives and conflicts. Whether the government intervenes to allocate resources depends on the economic system.

7. Berlin Wall 1989 Signalled the end of Communism

8. Command/Planned Economy Resources are allocated by the command mechanism (i.e. the government). All decisions about what and how much and who should produce goods/services are taken by government. Only exist in a dictatorship government. Consumers had to queue to buy goods, whose prices were fixed by governments, resulting in shortages and poor quality goods. Command economies broke down. Still exist: China, North Korea, Cuba.

9. Market Economy Resources are allocated by the price mechanism and market forces. Allocates scarce resources among competing uses. Market could be anything from a street market, to buying goods and services online, to markets such as eBay! One example would be labour, exchanged for cash, as different prices.

10. Prices and Profits in Free Market Economy • Scarce resources achieve high prices. E.g. Diamonds • Prices and profits have three key functions: • Incentive function • Rationing function • Signalling function Prices and Profits

11. Prices and Profits in Free Market Economy • When prices rise: • Consumers tend to ration their demand. • Sends a signal to producers that there is a scarcity or shortage. • Creates an incentive for suppliers to increase supply as more profit is potentially available. Prices and Profits

12. Prices and Profits in Free Market Economy • When prices fall: • Consumers increase their demand, end to rationing. • A signal is sent to producers that there is too much supply and scarcity falls. • Creates an incentive for producers who see profits falling to leave the market. Prices and Profits

13. 100 80 60 US('90)/bbl 40 20 0 1970 1980 1990 2000 2010 2020 As oil prices increase, motorists would spend more money on petrol and be tempted to ration the amount of journeys, cutting demand for petrol. Oil companies are incentivised to increase supply by developing oil fields. High market price has signalled new firms should enter the markets.

14. Cuban Economy, changing for the better?

15. Talking Points What were the problems being experienced in Cuba’s command economy? Why might small changes be happening to Cuba’s economy? What may be the benefits and drawbacks of Cuba changing from a command to a market economy?