Economic Systems and Goals

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Economic Systems and Goals

• SRVHS Economics

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Fundamental Problem

• Scarcity Unlimited needs and wants, limited
  resources
• ? Choice
• Efficiency minimizing costs of production most
  out for least in
• Efficient good
• Danger accept this, and lots of unintended
  consequences accrue

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The Three Economic Questions

• What goods and services should be produced?
• Guns vs. butter/capital vs. consumer
• How should these goods and services be produced?
• How combine factor resources (land, labor,
  capital, entrepreneurial ability)
• Who consumes these goods and services?
• US Distribution of income factor payments
  wages, rent, interest, profit (for
  entrepreneurs)

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Economic Goals

• Efficiency
• Making the most of scarce resources
• Freedom
• Freedom to make own choices
• Security and Predictability
• Products available, payments made, safety net
• Equity
• Fair distribution of wealth
• Growth and Innovation
• Search for higher standard of living
• Other
• Environmental protection, global domination, etc.

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Economic Systems

• Traditional
• Tradition determines economic answers
• Market (free market / capitalist)
• Individuals answer based on exchange
• Centrally Planned (command)
• Central authority answers questions
• Mixed
• Combination traditional, market, and command

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Traditional Economy

• Advantages
• Support entire group, not just individual
• Favor economic predictability and economic equity

• Disadvantages
• Static
• Little innovation
• Deal ineffectively with crisis
• Lower standard of living

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Centrally Planned Economy

• Disadvantages
• Extremely inefficient (lack of incentives)
• Starvation very bad in agricultureCollectives
  (Russia and China)
• Poor long-term performance
• Low standard of living
• No economic freedom

• Advantages
• Able to focus resources of society during crisis,
  especially in heavy industry (Stalins Five Year
  Plans WWII)
• Guaranteed jobs and income
• Equity

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Types of Centrally Planned Economies

• Socialism reformist democratic means should be
  used to evenly distribute wealth throughout a
  society (Sweden)
• Communism revolution will place all economic
  power in the hands of the government (North
  Korea)
• Fascism central government closely controls the
  activities of a limited market economy for
  state purposes (China)

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American Free Enterprise

• An economic system that permits business to
  operate with limited government involvement.

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Features of Free Enterprise

• Economic Freedom
• Competition
• Private Property
• Contracts
• Self-interest
• Voluntary Exchange
• Profit Motive

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Competition

• Producers have the right to engage in rivalries
  to gain business (market share).
• This competition should keep prices low for
  consumers and stimulate innovation.
• In reality, capitalism tends toward monopoly and
  oligopoly, with one or a few companies dominating
  a market (Microsoft, Pepsi and Coke).

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Private Property

• Individuals and businesses have the right to buy
  and sell as much property as they want. Property
  owners may prohibit others from using their
  property.
• Sometimes, however, the needs of the society
  outweigh those of the individual and the
  government has the right of eminent domain.

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Contracts

• Individuals and businesses have the right to make
  agreements (written or oral) to buy and sell
  goods, agreements that are enforceable by law.
• This is also known as the rule of law.

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Voluntary Exchange

• Consumers and producers may freely buy and sell
  goods when the opportunity costs of such
  exchanges are worthwhile.
• Both parties expect to gain from the exchange.

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Profit Motive

• Profit the gain that occurs during financial
  dealings.
• Profit is a powerful incentive that leads
  entrepreneurs and businesses to accept the risk
  of business failure.
• Profit motive is part of the idea of the
  invisible hand, which also holds that individual
  self-interest leads to social well-being.
• The profit motive is mitigated somewhat by taxes
  on high incomes, although many businesses avoid
  paying their full share through creative
  accounting and moving off-shore.

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Governments Role in the Free Enterprise System

• Often the invisible hand is not enough
  government must step in to provide for the public
  interest.
• The actions the government takes are called
  public policy, are influenced by the public
  through elections, campaign contributions,
  political activism, etc.

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Public Policy

• The Government primarily provides
• Regulation
• Safety Net
• Public Goods
• Stability

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Regulation

• The government attempts to control the quality
  and nature of goods and services that affect the
  well-being of the public
• FDA (Food and Drug Administration)
• EPA (Environmental Protection Agency)
• OSHA (Occupational Safety and Health
  Administration)
• FCC (Federal Communications Commission)
• EEOC (Equal Employment Opportunity Commission)

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Safety Net

• The Federal government has been called an
  insurance company with a side line in national
  defense and education.
• The major expenditures of the Federal Government
  are for Medicare and Medicaid (medical assistance
  for the poor and elderly), and Social Security
  (retirement insurance).
• Welfare programs designed to lift the poor above
  the poverty threshold represent a very small
  percentage of government expenditures.
• Most welfare programs of this type are done
  through cash transfers such as through TANF
  (Temporary Assistance for Needy Families)

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Public Goods

• Because of the free rider problem the government
  must step in and provide certain goods and
  services that benefit the entire society but no
  individual wants to pay for national defense,
  education, dams.
• These goods and services are known as public
  goods.

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Public Goods

• Characteristics
• It is inefficient or impractical 1) to make
  consumers pay individually and 2) to exclude
  nonpayers.
• Any number of consumers can use them without
  significantly reducing benefits to any single
  consumer (highways, parks, national defense).

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Public Goods

• The public sector must step in when the private
  sector fails to provide a good because
• 1) the benefit to each individual is less than
  the cost that each would have to pay if it were
  provided privately
• 2) the total benefits to society are greater than
  the total cost

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Stability

• The government regulates the money supply in
  order to combat inflation while also having
  steady growth.
• This is done largely through the Federal Reserve
  System.
• The government tracks growth of the economy by
  measuring gross domestic product (GDP).