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Chapter 2


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Chapter 2

  1. 1. Chapter 2:Economic Systems and Decision Making Section 1: Economic Systems Section 2: Evaluating Economic Performance
  2. 2. Things to look for…(section 1) What are the 3 main kinds of economic systems? Give an example of each kind of economic system. Give two examples of market locations.
  3. 3. Economic Systems Economic System – an organized way of providing for the wants and needs of the people of a particular society. Three major kinds of economic systems exist although most economies combine elements of all three to form mixed economies. *The three major kinds of economic systems are traditional economies, command economies, and market economies.
  4. 4. Traditional Economy In a society with a traditional economy, the use of scarce resources and nearly all economic activity stems from ritual, habit, or custom. They also dictate social behaviors. Individuals cannot make their own decisions of what they want or would like to have. Their roles are defined by the customs of the elders and/or their ancestors.
  5. 5. Traditional Economy *An example of a traditional economy would be societies like the Australian Aborigines, the Mbuti in central Africa, or the Inuit of northern Canada. Their customs dictated that they share everything with one another, such as a bear or walrus that they hunted and killed. This provided meat, clothing, and shelter for entire villages for the extremely cold winters. Due to these customs, the Inuit survived thousands of years.
  6. 6. Traditional Economy The main advantage of this economic system is that every person in the society knows their role. There is little to no doubt of what is expected of you. The main disadvantage is that it tends to discourage new ideas and new ways of doing things. This lack of progress leads to stagnation and a lower standard of living than other economic systems.
  7. 7. Command Economy In a Command Economy, a central authority makes the major decisions about what, how, and for whom to produce. In a pure command economy, the government makes the major economic decisions. This means that the government decides if houses will be built, how they will be built, and for whom they will be built. Most command economies limit private property rights.
  8. 8. Command Economy Most people are not allowed to own their homes, businesses, or other productive resources. Individual rights or freedoms are also limited. For example, if the government wants more mathematicians, then the universities train more mathematicians. This limits personal choice. Government officials usually make choices that favor themselves (homes, vacations, cars, etc.).
  9. 9. Command Economy *Modern examples are hard to find but North Korea and Cuba are pure command economies. In the 1970’s and 1980’s, the Soviet Union was the biggest example of a command economy. In the former USSR, the State Planning Commission determined needs, set goals, and allocated resources to the sector which they felt the country most needed.
  10. 10. Command Economy The main advantage of this economic system is that it can change direction drastically. The former USSR went from a rural agricultural society to an industrial powerhouse in just a few decades by emphasizing industrial growth. Some disadvantages are that they ignore basic wants/needs of consumers, encourage meeting quotas rather than making good products, and need a large decision-making bureaucracy that is unable to deal with minor day-to-day issues.
  11. 11. Market Economy In a market economy, people make decisions that are in their own best interest. A market is an arrangement that allows buyers and sellers to come together to exchange goods and services. *A market can be a physical location such as a farmer’s market, or a virtual location such as eBay. Market economies are characterized by a great deal of freedom.
  12. 12. Market Economy Consumers determine what to produce by their purchases. Businesses are free to find the best method of production when determining how to produce. The income that consumers earn and spend in the market determines for whom to produce. They also have private ownership of resources. This economic system is based on capitalism (an economic system where private citizens own the factors of production).
  13. 13. Market Economy *Examples would include the United States, Japan, South Korea, Australia, Singapore, Great Britain, and parts of Western Europe. Many of the above countries are among the most prosperous in the world. While there are differences between these countries’ systems, they share the common elements of markets and the private ownership of resources to seek profits.
  14. 14. Market Economy Advantages include a high degree of individual freedom, gradual adjustments to change over time, a relatively small amount of government interference, decision-making is decentralized, a large variety of goods and services, and a high degree of consumer satisfaction. Disadvantages are that this system does not provide for everyone (very young, very old, sick, etc.), may not provide enough basic goods and services, and a high degree of uncertainty.
  15. 15. Mixed Economy Most countries have a mixed economy (systems that combine elements of all three types). Examples are socialism and communism. In socialism, the government owns some but not all of the basic productive resources. Socialist governments also provide health care. Communism is an extreme form of socialism where all property is collectively, not privately, owned. Communism rarely is practiced as designed.
  16. 16. Mixed Economy Examples include China and Norway One major advantage would be providing for some people who might otherwise be left out. One major disadvantage is that the more services and higher benefits provided by the government often lead to higher costs to the people. Germany, for example, offers many benefits but also has one of the highest tax rates in the world. Historically, capitalism has proven more effective than either socialism or communism.
  17. 17. Q and A What are the 3 main kinds of economic systems? Traditional economies, command economies, and market economies. Give an example of each kind of economic system. Traditional – Inuit of northern Canada, Command – North Korea, Market – United States Give two examples of market locations. Physical – farmer’s market, Virtual – eBay
  18. 18. Open-book/open-notebook Quiz Go to page 56 and answer numbers 17 – 20. This is a 100 point quiz, you may use your notes and book… and, if need be, me.
  19. 19. Things to look for…(section 2) What are the 7 major economic goals shared by most Americans?
  20. 20. 7 Economic Goals *The seven major economic goals shared by most Americans:1. Economic Freedom2. Economic Efficiency3. Economic Equity4. Economic Security5. Full Employment6. Price Stability7. Economic Growth
  21. 21. Economic Freedom Americans traditionally value the freedom to make their own economic decisions. Individuals like to choose their own occupations, employers, and uses for the money. Businesses like to choose where and how they produce.
  22. 22. Economic Efficiency Most people recognize that resources are scarce and that factors of production must be used wisely. If resources are wasted, fewer goods and services can be produced. This means that fewer wants and needs can be satisfied.
  23. 23. Economic Equity Americans have a strong tradition of justice, impartiality, and fairness. It is illegal to discriminate on the basis of age, sex, race, religion, or disability in employment. As a nation, we have developed a minimum wage. Minimum Wage – the lowest legal wage that can be paid to most workers. Most people believe that advertisers should not be allowed to make false statements.
  24. 24. Economic Security Americans desire protection from such adverse economic events as layoffs and illnesses. This is why we have developed unemployment benefits when you lose your job due to no fault of your own. This is also why many companies have insurance plans for their employees. Nationally, Congress has set up Social Security – a federal program of disability and retirement benefits that covers most working people.
  25. 25. Full Employment When people work, they earn income by producing goods and services for others. Without jobs, people cannot support themselves or their families. The goal of full employment even became law when Congress passed the Employment Act of 1946 in an effort to avoid the widespread joblessness before World War II.
  26. 26. Price Stability Another goal is to have price stability. If inflation occurs, workers need more money to pay for food, clothing, and shelter. Inflation – a rise in the general level of prices People who live on a fixed income find that bills are harder to pay and planning for the future is more difficult. Fixed Income – an income that does not increase even though prices go up.
  27. 27. Price Stability High rates of inflation can discourage business activity. Interest rates on loans tend to increase with the price of goods and services. When interest rates get too high, borrowing and spending by businesses can be discouraged also.
  28. 28. Economic Growth Most people hope to have a better job, a newer car, their own home, and a number of other things in the future. Overall growth enables more people to have more goods and services. Since the nation’s population is likely to increase, economic growth is necessary to meet everyone’s needs.
  29. 29. Economic vs. Social Goals A society resolves the conflict between economic and social goals by comparing their estimate of the costs to their estimate of the benefits, and then they vote for political candidates who best represent those positions.
  30. 30. Q and A What are the 7 major economic goals shared by most Americans?1. Economic Freedom2. Economic Efficiency3. Economic Equity4. Economic Security5. Full Employment6. Price Stability7. Economic Growth
  31. 31. Open Book/Open Notebook Quiz Go to page 56 and answer numbers 21 – 23. This is a 100 point quiz, you may use your notes and book… And your magic 8 ball.