II. Economic Systems And Decision Making
A. Economic Systems- The organized way of providing for the wants and needs of any given society. The way these provisions are made determines what kind of economic system the society has (What... How... For whom to produce).
1. Traditional Economy- The allocation of scarce resources and nearly all other economic activity stems from ritual, habit, or customs. In this model, wants and needs are defined by the customs of the elders and ancestors and not what the "individual" wants.
a. Strengths- Every single member of the society knows what is expected of them. Little uncertainly exists as to what, how or whom to produce for. You are born in to your social order. Life is stable, predictable and continuous.
b. Weaknesses- This economic system will discourage new thoughts, innovations and technology. The lack of progress creates stagnation and leads to a lower standard of living.
2. Command Economy- Whereas a Central Authority (Government) makes most if not all the decisions for "what", "how" or "for whom" to produce for decisions. Societies are expected to produce whatever their leaders ask for (i.e.: North Korea, Cuba, People's Republic of China and the former USSR).
a. Strengths- This type of economy can change focus on a national scale in very little time.
1. This economy is not designed to meet the needs of individuals but rather to meet the needs of society in mass. People are often told to sacrifice for the good of the state and benefit of future generations.
2. Another weakness is the lack of incentive. There is little to no motivation as labor is told what to do, rather than progress in what they do.
3. Creation of large-scale bureaucracies.
4. Little to no flexibility in the economy on a day to day basis.
5. Limits unique ideas.
3. Market Economy- Is an economic system where people and firms act in their own best interests to answer the "what", "how", and "for whom" questions. As long as there is an outlet for buyers and sellers, a market may exist.
1. Market may adjust itself over time.
a. Gas crisis of the 1970's and the creation of "small" cars.
2. The market is free to produce whatever it wants.
3. Very little government intervention.
4. Decision-making is decentralized (individual vs. authority).
5. Variety of goods and services exists.
6. Consumer satisfaction (Need vs. Want)
a. I need clothing. I want jeans. I have Levis, CK, Gap, etc. to choose from.
1.Generally the only weakness is the "for whom" to produce question and the identification of a market population.
2. Another may be monopolies.
3. Labor force is free to roam, change, retire and die.
B. Evaluating Economic Performance
1. Economic and Social Goals
a. Economic Freedom- Freedom determines individual choice.
b. Economic Efficiency- The recognition of scarce resources and factors of production. Producers must be able to determine the maximum output for the minimum cost while not sacrificing quality.
c. Economic Equity- Justice, impartiality and fairness. The ideals of equal pay for equal work. (Civil Rights legislation of the 1960's).
d. Economic Security- The safety nets of Social Security and entitlements.
e. Full Employment- The prosperous nature of the market economy works best when full employment is approached.
f. Price Stability- Market economies must not waiver on prices.
1. Inflation- Rise in the general level of prices.
2. Fixed Income- An income that does not increase even though prices will vary.
g. Economic Growth- This determines the social nature of a market economy.
h. Future Goals?-
2. Trade-Offs Among Goals-
a. What is right?
b. What is fair?
c. What is equal?
C. Capitalism and Free Enterprise- Capitalism is where private citizens own the factors of production. IT thrives on competition. Free Enterprise is another term used to describe the American economy. It is a system where competition is allowed to flourish with minimum amounts of government intervention.
1. Competition and Free Enterprise-
a. Economic Freedom- Freedom to choose what kind of work to perform. Freedom to choose what and where they want to produce. Freedom to choose when to produce. Freedom promotes opportunity. Freedom includes the risk of success or failure.
b. Voluntary Exchange- The act of buyers and sellers freely and willingly engaging in market transactions.
1. Buyers- May bank, hide or spend their money.
2. Sellers- May determine price, quantity and quality of goods.
c. Private Property- The right and privilege to own what ever you want (house, boat, car, etc.). This includes tangible goods and intangible skills (accountant's fees, tutoring prices, and quarterback's salary).
d. Profit Motive- People are free to risk their savings or any part of their wealth for that matter in the pursuit of profit or business venture. If they are a success, they will earn profits. If they should fail, they will have assumed the risk of losing their wealth.
2. The Role of the Entrepreneur- These are individuals, who in the pursuit of profit, take on the risks of capitalism (success vs. failure) in the attempts of not only creating wealth for themselves but playing a role in production for society. These are the restaurateurs, video arcade stores, mall outlets, etc. Despite the enormous amounts of risk (and the tendency to fail), these individuals provide for growth technology and culture.
3. The Role of the Consumer-
a. Consumer Sovereignty best describes the role of the consumer. They play a critical role in what is produced and in what quantity on the basis of choice/discretion. For example in the television market, consumers started with black and white television sets. They then went to color. Televisions then expanded into other viewing models and consuls. Where is the market headed? Digital? Flat screen? What will it look like? How large is the screen? Consumers determine these questions...and the answers!
4. The Role of Government
a. Protector- Protect against false and misleading claims as well as imperfect products that can be dangerous.
1. Automotive Crash Dummies
2. Health Food Supplements
3. Employers/Employee Rights
b. Provider and Consumer- Just like any other form of business, the government provides certain services to its citizens.
1. National Government- Defense
2. State Government- Schools, Public Welfare
3. Local Government- Libraries, Parks, Bussing, Police
c. Regulator- The overseer to certain industries, such as banking or nuclear power, to insure their safety.
d. Promoter of National Goals-
6. Full Employment