CHAPTER
1
ECONOMIC
SYSTEMS
THE CLASSICAL ECONOMIC SYSTEMS
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THE TRADITIONAL SYSTEM
o
ECONOMIC DECISIONS ARE MADE BY THE ELDERLY
o
EMPHASIS IS PLACED UPON CUSTOM AND TRADITION
o
THIS IS A STATIC AS OPPOSED TO A DYNAMIC SYSTEM
o
STRENGTHS
§
STABILITY AND PREDICTABILITY
o
WEAKNESSES
§
DISCOURAGES NEW IDEAS
§
LEADS TO A LOWER STANDARD OF LIVING
o
OPPORTUNITY/COST
§
STABILITY/LOWER STANDARD OF LIVING
o
THE INUIT SOCIETY OF
§
POSSIBLY FOUND IN ABORIGINAL SOCIETIES IN ITS PUREST
FORM
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THE COMMAND SYSTEM
o
DECISIONS ARE MADE BY GOVERNMENT OR A CENTRAL
PLANNING AGENCY
o
COMMUNIST NATIONS ARE A CONTEMPORARY EXAMPLES
o
A FEUDAL SYSTEM IS AN EXAMPLE FROM HISTORY
2/2
o
STRENGTHS
§ CAPABLE
OF DRAMATIC CHANGE OVER A SHORT PERIOD OF TIME
· EXAMPLE –
THE
o
WEAKNESSES
§ NOT
CONSUMER ORIENTED
§ LACK OF
INCENTIVES LEADS TO INEFFICIENCY
· MARX –
FROM EACH ACCORDING TO HIS ABILITY; TO EACH ACCORDING TO HIS NEED
§ LARGE
BUREAUCRACY
· SLOWS
DECISION MAKING
· INFLEXIBLE
· MINOR
ADJUSTMENTS ARE NEARLY IMPOSSIBLE
§ NEW IDEAS
ARE DISCOURAGED
o
OPPORTUNITY/COST
§ ABSOLUTE
EQUITY/EFFICIENCY
§ GUNS/BUTTER
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THE MARKET SYSTEM
o
DECISIONS ARE MADE BY THE CONSUMER/PRODUCER
o
WHEN A CONSUMER SPENDS MONEY HE IS CASTING AN
ECONOMIC VOTE FOR WHAT IS TO BE PRODUCED
o
CONSUMER SOVEREIGNTY
2/3
o
STRENGTHS
§ CAN
EASILY CHANGE OR ADAPT
§ FREEDOM
TO MAKE ECONOMIC DECISIONS
§ LOW
DEGREE OF GOVERNMENTAL INTERFERENCE
· LAISSEZ FAIRE – ADAM
SMITH
· MAINTAIN
A COMPETITIVE ENVIRONMENT
· PROTECT
THE CONSUMER
§ DECENTRALIZED
DECISION MAKING
§
GREAT VARIETY OF GOODS AND SERVICES AVAILABLE
·
IF A PROFIT CAN BE REALIZED, A PRODUCT WILL BE MADE
AVAILABLE
o
NICHE INDUSTRIES
§
HIGH DEGREE OF CONSUMER SATISFACTION
§ OPPORTUNITY/COST
·
EFFICIENCY/UNFAIR
o
ONLY PRODUCTIVE RESOURCES ARE REWARDED
o
WEAKNESSES
§
REWARDS ONLY PRODUCTIVE RESOURCES
§
SOMETIMES MARKETS FAIL
·
MONOPOLIES COULD DEVELOP
·
WORKERS CAN BECOME UNEMPLOYED DUE TO RECESSIONS AND
DEPRESSIONS
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TO BE EFFECTIVE, A MARKET SYSTEM MUST
o
BE REASONABLY COMPETITIVE
o
MUST BE FREE TO MOVE FROM ONE ECONOMIC ACTIVITY TO
ANOTHER
o
ADEQUATE INFORMATION MUST BE AVAILABLE TO EVERYONE
2/4
ECONOMIC GOALS
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THEY ARE IMPORTANT BECAUSE THEY ACT AS BENCHMARKS IN
DETERMINING WHETHER OR NOT AN ECONOMIC SYSTEM IS MEETING THE NEEDS OF SOCIETY
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MAJOR ECONOMIC/SOCIAL GOALS
o
ECONOMIC FREEDOM
§
CHOOSE A JOB OR START A BUSINESS, CHOOSE HOW TO
SPEND, WHERE TO LIVE
o
ECONOMIC EFFICIENCY
§
INEFFICIENCY LEADS TO LOWER PRODUCTIVITY WHICH LEADS
TO A LOWER S.O.L.
o
ECONOMIC EQUITY
§
EQUALITY OF
§
EQUAL; PAY FOR EQUAL WORK
§
LAWS TO PROMOTE COMPETITION
§
LAWS TO PROTECT CONSUMERS
·
FROM FRAUDULENT ADVERTISING
·
FROM UNSAFE OR DANGEROUS PRODUCTS
·
FROM UNFAIR PRICING
·
FROM FRAUD
o
ECONOMIC SECURITY
§
PROTECT WORKERS FROM JOB LOSS
§
WORKERS COMPENSATION
§
UNEMPLOYMENT COMPENSATION
§
SOCIAL SECURITY – RETIREMENT AND DISABILITY
o
FULL EMPLOYMENT
§
PROVIDE A JOB FOR ANYONE WILLING TO WORK
§
INSTITUTE A JOBS PROGRAM TO STIMULATE THE ECONOMY
2/5
o
PRICE STABILITY
§
NO INFLATION OR DEFLATION
·
PRICE INSTABILITY HINDERS FINANCIAL PLANNING
·
INFLATION HURTS PEOPLE ON FIXED INCOMES
·
INSTABILITY HINDERS ECONOMIC GROWTH AND EXPANSION
o
ECONOMIC GROWTH
§
ECONOMIC GROWTH TRANSLATES TO MORE GOODS AND
SERVICES AND A HIGHER S.O.L.
o
FUTURE GOALS
§
ENVIRONMENTAL PROTECTION
§
PROTECTION OF ENDANGERED SPECIES
§
CONSERVATION OF NATURAL RESOURCES
TRADE OFFS BETWEEN GOALS
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ALL ECONOMIC POLICIES MUST BE VIEWED AS
OPPORTUNITY/COST DECISIONS
-
EXAMPLES
o
NEW MALL (JOBS CREATED), DOWNTOWN (JOBS LOST)
o
INCREASE IN MINIMUM WAGE – HIGHER PAYING JOBS BUT
FEWER JOBS
o
DEVELOPMENT – LOSS OF
o
MORE GOVERNMENT SERVICES – HIGHER TAXES
o
GUNS – BUTTER
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AS A SOCIETY WE MUST COME TO A CONSENSUS AS TO WHAT
IS IMPORTANT
2/6
THE FREE ENTERPRISE SYSTEM
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CHARACTERISTICS
o
ECONOMIC FREEDOM
o
VOLUNTARY EXCHANGE
§
BOTH CONSUMERS AND PRODUCERS COME TO THE MARKET AND
ATTEMPT TO OPTIMIZE THEIR RESOURCES
§
A MARKET IS ESSENTIAL TO FREE
§
PROFIT – def – THE EXTENT TO WHICH CONSUMER OR PRODUCER IS BETTER
OFF AFTER AN EXCHANGE
o
PROFIT MOTIVE – INVISIBLE HAND
o
PRIVATE PROPERTY
§
DECISIONS CONCERNING THE USE OF RESOURCES ARE MADE
WITHIN THE PRIVATE SECTOR
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ROLE OF THE ENTREPRENEUR
o
ORGANIZES LAND, LABOR, AND CAPITAL IN SEEKING PROFIT
o
ADVANTAGES OF COMPETITION
§
LOWER PRICES
§
BETTER QUALITY
§
MORE VARIETY
§
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ROLE OF GOVERNMENT
§
PROTECTOR
§
NATIONAL DEFENSE
§
POLICE AND FIRE PROTECTION
§
CONSUMER PROTECTION
§
REGULATOR
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ROLE OF THE CONSUMER
o
MAKE ECONOMIC DECISIONS BY CASTING ECONOMIC BALLOTS
§
EDSEL, BETAMAX, 8 TRACKS, GASAHOL, PEPSI
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