Econ Ch. 2

Traditional Economy

use of resources based on ritual, habit, or custom

examples of traditional economy

Inuit tribes, Australian Aborigines

traditional economy advantages

little uncertainty over what to produce, how to produce, and for whom

traditional economy disadvantages

* discourage new ideas and new ways of doing things; stagnation; lower standard of living

Command Economy

central authority (government) makes decisions

Command Economy example

Soviet Union, Cuba, North Korea

Command Economy advantages

* cheap public services & health care; can change direction drastically (switch from agriculture to industry)

Command Economy disadvantages

*  ignore basic wants & needs of consumers; large decision making bureaucracy raises cost of production; no flexibility; few rewards; Limited private property, few personal freedoms

Market Economy

people make decisions in their own best interest; private ownership of resources & factors of production

Market Economy example

(U.S., England, Japan, etc.)

Market Economy advantages

individual freedom (how to spend money, where to work, etc.); adjusts gradually to change over time (buying gas vs. buying SUVs); small amount of government interference; decision making is decentralized; variety of goods/services; high degree of consumer satisfaction

Market Economy disadvantages

* doesn’t provide enough goods/services for everyone; high degree of uncertainty (loss of job)

Economic Freedom

choose your job, etc.

Economic Efficiency:

not wasting resources

Economic Equity

fairness; minimum wage (lowest legal wage paid to most workers)

Economic Security:

protection; Social Security, healthcare, unemployment insurance

Full Employment:

everyone has a job

Price Stability:

avoid inflation (rise in general level of prices)

Economic Growth:

better job, newer car, etc.

Free enterprise

resources are privately owned, & competition thrives with minimum government interference

Characteristics of free enterprise

* Economic  freedom
* Voluntary exchange
* Private property rights; gives people incentive
* Profit motive: incentive to earn reward of money
* Competition: struggle to attract consumers

Voluntary exchange

act of buyers/sellers freely willing to engage in market transactions

role of entrepreneur

* Organizes & manages land, capital & labor

Why be an entrepreneur?

* Tired of working for someone else
* “be my own boss”
* Dream of success, but high risk of failure

Entrepreneur’s success leads to:

growing business, hiring more workers, pay raises, better products, government gains more tax revenue, creation of more companies which can lead to lower prices

Role of the consumer

They determine which products are produced based on their buying habits

 consumer sovereignty

customer rules the market; “customer is always right”

consumers want:

* change; new ideas & products

roles of government

* protector
* provider
* regulator
* consumer

gov as protector

enforce laws that protect consumer (FDA, EPA, etc.); enforce laws that prevent abuse (discrimination laws)

gov as provider

* provides goods/services to citizens
* Justice system, national defense
* Funding for schools, roads, libraries, agriculture

gov as regulator

* preserving competition
* Oversees interstate commerce, communication, banking, insurance rates, building permits

gov as consumer

* spend money to consume resources
* Government spends more than all private businesses combined