Economic Notes Chapter 2
Topic 4 — Economic Systems
Survival of society requires that its people are provided basic needs — Food, Shelter, Clothing.
An Economic System is how a society provides for the needs and wants of its people.
Three Types (3) of Economic Systems: traditional, command, & market Economies:
— allocation of scarce resources results from ritual, habit, or custom.
Strength—Everyone knows: What, How & For Whom things are produced.
Weakness—Stagnant, new ideas punished, lack of progress lowers the Standard of Living.
standard of living quality of life based on ownership of necessities and luxuries that make life easier.
2. —Command— central authority makes economic decisions.
Strength—can change direction drastically. Soviet Union changed from Agriculture to Manufacturing
Weakness—Does not meet needs & wants of Individuals, Lack of incentive to work hard, large decision marking bureaucracy, not flexible to small adjustments, no new ideas or individual incentive because decisions made by the central planners.
3. —Market— people & firms act in their own best interests (The Invisible Hand). Supply, Demand, and the Price
System help make the decisions and allocate resources.
Markets: Flea, Grocery, Road Side Stand, Stock Exchange, bulletin boards.
Market exists anywhere that buyers and sellers meet to conduct business: Offices, phone, internet
Market Economy is the same as Free Enterprise Economy.
Strengths (6)
1) Can adjust to changes,
2) Everyone is free to make their own decisions
3) Government is not involved (exceptions: National Defense, Public Interest & Safety)
4) Decentralized decision making (billions of individual decisions made)
5) Variety of Goods & Services
6) Consumer satisfaction.
- STRENGTHS: (6)—Adjust—Freedom—No Government—Decentralized Decisions—Variety—Consumer Satisfaction.
Weakness—
For Whom. May not be fair to those too young, too old, too poor, too sick.
Government & private groups must look after the needs of those without the economic resources to have
a voice in a Market Economy.
Markets do not always work.
Characteristics (3) a market needs to work:
1). Must be competitive,
2). resources must be free to move from one activity to another,
3). Consumers must be adequately informed (alternatives known) so wise choices can be made.
If all of these are not present then the Market might fail to operate properly.
Review — Why is Economic Decision Making necessary?
Topic 5 — Evaluating Economic Performance
Economic and Social Goals (7)
1 —Economic Freedom— Freedom to make your own economic decisions: occupation, employer, used of money, what to produce, where to produce, how to produce a product/service. Economic & Political Freedom is the cornerstone of USA Society.
2 — Economic Efficiency— Resources scarce and factors of production must be used wisely. Waste allows fewer goods and services to be produced and less needs & wants are satisfied. Economic decisions must be efficient so the benefits gained exceed the costs incurred. Society determines costs. Social vs. Economic Considerations.
3 — Economic Equity— American sense of justice, impartiality & fairness. American Law based on contracts. Equal pay for equal work. Illegal to discriminate: age, sex, race, religion & disability in employment. Laws protecting consumers: false advertising, unfair pricing, hazardess products.
4 — Economic Security— Protection from adverse economic events—Layoffs, illness, unemployment, injuries Social Security—disability & retirement benefits.
5 — Full Employment— People want as many jobs as possible to produce goods and services for others. Provide for own needs.
6 — Price Stability— People want stable prices. Inflation is the rise in the general level of prices. Fixed Income—income that does not increase with rising prices. Retirees. Meeting basic needs—wants. Price stability add a degree of certainty to the future.
Creeping — low rate of inflation, usually 1 to 3%.
Galloping — intense — ranging from 100 to 300%.
Hyperinflation — abnormal — excess of 500 percent per year; last stage of a monetary collapse.
7 — Economic Growth— Most people want a better job, newer/faster/larger/fancier car, home, luxuries. Growth is needed so that more goods and services are available. Because of population growth economic growth is necessary to meet everyone's needs. Economic Growth must exceed population growth in order for any improvement in living.
TRADEOFFS— Goals might conflict. Opportunity costs. Full employment vs. low cost shoes. New shopping developments. Housing developments. Minimum wage—loss of jobs—loss of freedom to determine value of labor. The USA is flexible enough to allow choices, make compromises satisfy majority of citizens most of the time.
Review — How is Economic Decision making different in Traditional, Command and Market Economics.
Topic 6 — Capitalism & Free Enterprise
PROFIT
Capitalism — where the factors of production are privately owned.
Four (4) Characteristics ofCapitalism(Free Enterprise)
1— Economic Freedom— Choices: work, jobs, homes, when to work, where to live, watch, recreation.
2— Voluntary Exchange— Where buyers and sellers freely & willingly engaging in market transactions.
3— Private property— concept giving people the right to control their possessions as they wish.
4— Profit— When you are better off at the end of a period than at the beginning— measured in dollars.
Profit Motive- Encourages people and organizations to improve their material well-being.
Role of the Entrepreneur— Start new business, provide jobs, Willing to take risks, Many fail.
New products, greater competition, more production, higher quality, lower prices, innovation.
Role of the Consumer — Consumer Sovereignty: determines goods and services in an open market.
Consumers vote on what is or is not produced by making purchases in the marketplace.
Role of the Government — (5)Protector, provider of goods and services, consumer, regulator, national goals.
1) Protector—false & misleading advertising, impure food & drugs, safety, abuses of individual freedoms, discrimination based on age, sex, race or religion. Protects property right, enforces contracts and sets the "rules of the game to ensure an efficient & fair economy.
2) Provider— Government provides Defense, education, public welfare, parks, libraries, roads, transportation, etc.
3) Consumer— Government consumes factors of production: Land Labor, Capital, Entrepreneurship.
4) Regulator— Preserves Competition, oversees interstate commerces, communications, banking.
- States regulation insurance, autos, licensing.
- Local government: building permits, zoning, licensing.
5) Promoter of National Goals— Reflects the will of a majority of the people. Reflects peoples desire to modify the economic system to achieve the economic goals of freedom, efficiency, equity, security, full employment, price stability and economic growth. Government programs: Social Security, child labor laws, minimum wages, etc.
Americans have freely decided to modify their free enterprise economy.
Because of the this:The US is really a Mixed Economy — Modified Private (or free) Enterprise Economy:
Free Enterprise System with some government involvement.
Where people freely carry on their economic affairs but are subject to some government intervention and regulation.
REVIEW — What is the Entrepreneur's role in the US economy?
What is the Consumer's role in the US economy?
What is the Government's role in the US economy?
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February 2 1998