econ chapter 2 & 3

What, For Whom, and How

How are the 3 basic economic questions answered?

Three questions are answered before they are considered

Life is generally stable, predictable, and continuous

Strengths of a traditional economy

The economy can change drastically to fit drastic times

Little uncertainty; decisions made for them

Strengths of a command economy

Can adjust to change over time; dependent upon the consumer

Producers have the freedom to make what they want if they think it will sell

Consumers can buy whatever they so choose

Allows for competition

Almost any product can and will be produced if a buyer for it exists

Strengths of a market economy

Providing assistance for people who might be left out of the country’s economic progress

Faster growth than command economies

Strengths of a mixed economy

The probability of “advancement” is minimal

Low standard of living

Weaknesses of a traditional economy

Does not look out for the individual

Does not look out for “now”, but rathe for the “future”

No incentives for the labor

Weaknesses of a command economy

Who reaps the benefits?

Not everyone’s basic needs are met

Personal economic insecurity

Some valuable services like education, justice, and health care are not provided equally

Weaknesses of a market economy

High tax, government inefficiency, risk of corruption, market distortion, and conflicting objectives

Weaknesses of a mixed economy

North Korea and Cuba

Two countries with a command economy

Singapore and Switzerland

Two countries with a market economy

Market shortcomings: inequality, monopolies, and public goods

Command shortcomings: incentives, shortages, consumer choice, flexibility

Explain how a mixed economy attempts to address the shortcomings of both market and command systems.

United States: private markets, government regulation, public goods, and social safety net

Give an example of a country with a mixed economy and describe how it balances market forces with government intervention.

Forces businesses to improve quality, lower costs, and serves consumer needs efficiently

Innovation: spurs, drives, and rewards

Pricing: drives it down, eliminates excess profits, prevents exploitation

Consumer choice: expands variety, elevates service standards, and shifts market power

Discuss the role of competition in a market economy. How does it impact innovation, pricing, and consumer choice?

Economic freedom, voluntary exchange, private property, profit motive, and competition

What are the five characteristics of a free market, capitalist economy (free enterprise)?

Consumers, entrepreneurs, and the government

Who are the 3 major players in the American free enterprise economic system?

Protector, provider, regulator, and consumer

What are the four roles of the government in a capitalist free enterprise economy?

Have your own private property and do whatever you want with it; a motivator for loans to expand your business

What incentives does private property give people living in the United States?

Economic freedom, economic equity, economic security, full employment, economic growth, economic efficiency, price stability

List the 7 broad economic goals of the United States.

Buy what you want, sell what you want, do the job you want to do

Freedom to risk success or failure

Economic Freedom

Buyers and sellers freely engage in market transactions

Voluntary Exchange

People own and control their possessions as they wish

Gives incentive to work

Makes borrowing possible and investing attractive

Private Property

Incentive to improve your material well-being

Freedom to seek profit ensures a stream of products

Profit Motive

Struggle among sellers to provide consumers with the best products at the lowest prices

Benefits consumers- bad products disappear

Helps make sure resources are used efficiently

Competition

Provider, regulator, protector, and consumer

Government

Buy products, control supply and demand

Consumers

Create businesses, take risks

Entrepreneurs

Germany-

Challenges: industrial collapse, mass layoffs, currency conversion shock, wealth and productivity gap

Successes: rapid infrastructure and modernization, rising living standards and income convergence

Choose a country we talked about in class and highlight some of the challenges and successes they’ve had in transitioning to capitalism.

Ritual, habit, custom

the “what,” “how,” and “for whom” questions are already answered

Traditional Economy

A central authority makes most of the what, how, and for whom decisions

Most often associated with dictatorships

Command (Planned) Economy

People and firms act in their own best interests to answer the what, how, and for whom questions

This system is based on the consumer

Supply and Demand

Market Economy

Tradition, government, and markets each answer some of the what, how, and for whom questions

Mixed economies come about when people from one type of economy come into contact with other cultures and adopt their technologies and ways of doing things, or when people are unhappy with the way their economy is performing

The state’s involvement in economic decisions can vary considerably

Includes characteristics of traditional, command, and market economies

Mixed Economy

an economic system where private individuals and businesses own the tools, factories, and resources used to make goods, and they run them to make a profit

Capitalism

an economic and political philosophy centered on collective or public ownership of the means of production, rather than private ownership.

Socialism

a political and economic ideology that aims to create a classless society with communal ownership of property and the elimination of private profit

Communism

an economic system where private businesses compete with little government control, and market forces like supply and demand set prices

Free Enterprise

the economic principle that consumer preferences and buying choices ultimately dictate what businesses produce and how resources are allocated in a market economy

Consumer Sovereignty