Basic Economic Decisions

1. Basic Economic Decisions for all types of Economic Systems

2. 1. What should be produced. 2. How should it be produced. 3. Who should receive it? 4. Can the system adjust?

3. How Decisions are Made Using an Economic System Method of organizing the relationship between businesses, households and the government to make the production decisions 4 Types

4. 1. Agrarian or Traditional - Follow in family business • Usually smaller groups • Few true examples A. What? What the family business has been producing (for generations)

5. 1. Agrarian or Traditional B. How? Using the same method that have been used (for generations) No incentive for change

6. 1. Agrarian or Traditional C. For Whom? Determined by place in society.

7. 1. Agrarian or Traditional Strengths • Economic security • Strong family/community ties

8. 1. Agrarian or Traditional Weaknesses • Resistant to change • Few economic incentives/freedom • Limited goods and services available • Keeps social order

9. 2. Market Economies - Based on price system • Interaction of buyers and sellers • Involves private property rights A. What? - Goods and services that are profitable - Goods and services consumers want.

10. 2. Market Economies B. How? Efficiently- least cost combination of resources

11. 2. Market Economies C. For Whom? Those who can pay.

12. 2. Market Economies Strengths • Efficient production • Prices coordinate production • Provides a wide variety of goods • Able to adjust for changing demand

13. 2. Market Economies Weaknesses • Not always socially desirable goods • No economic security • Imperfect knowledge about goods that are available

14. 3. Planned Economies • Government owns resources • Government make production decisions A. What? • Goods needed to meet economic planning targets

15. 3. Planned Economies B. How? Aimed at achieving targets Switch resources around to meet targets

16. 3. Planned Economies C. For Whom? Government decides who gets goods Bonuses for important workers

17. 3. Planned Economies Strengths • Can achieve social goals • Can eliminate unemployed resources • More equitable distribution of goods • More easily able to adjust resources

18. 3. Planned Economies Weaknesses • Over or underproduction • Few incentives for workers • Few choices for consumers • Increasingly complex process

19. 4. Mixed Economies • Combine aspects of market and planned economies • Includes almost all economies

20. 4. Mixed Economies Coordinating Mechanism Market System Planning Nazi Germany Private Public US Resource Ownership China Cuba

21. Problems With Transition from Planned to Market 1. People are used to government direction 2. Shortages of expert in Market operations: a. Legal b. Marketing c. Accounting 3. Inflation finding market value of goods and services

22. Which Market Type?? 1. Businesses are free to produce what ever they want and are always looking for cost-cutting techniques of production. Mixed? Market? Traditional? Planned? Market Market Market

23. Which Market Type?? 2. A catering business goes bankrupt, but its employees receive unemployment compensation while they look for other jobs. Mixed Mixed Market? Mixed Traditional? Planned? Mixed?

24. Which Market Type?? 3. Union and management representatives submit a deadlocked labor contract negotiation to the government for mediation. Mixed Mixed Mixed? Traditional? Mixed Market? Planned?

25. Which Market Type?? 4. Workers who have lost their jobs and incomes cut back their spending because there is no alternative source of emergency financial support once their savings runs out. Market Mixed? Market Market? Traditional? Planned? Market

26. Which Market Type?? 5. Consumers are unable to obtain fuel injectors and windshield wiper motors for their cars because they are not being produced, yet accordions, which are plentiful and not in demand, continue to be produced. Planned Planned Planned Traditional? Planned? Market? Mixed?

27. The Circular Flow of Goods and Services Factor Markets 4 Participants Businesses Households Product Markets

28. Which one? a. A real flow through a product market? b. A money flow through a product market? c. A real flow through a resource market? d. A money flow through a resource market? 1. Receiving a paycheck at the end of each month? 2. Delivering a specially ordered car to a buyer? 3. Receiving patient care in a hospital? 4. Using a credit card to buy a meal in a restaurant? 5. Earning profit at your summer ice cream stand? 6. Obtaining college credits? 7. Working overtime? a d b c

29. The Circular Flow of Goods and Services Factor Markets Resources Payments and Legal Resources with Government Involvement Business Taxes Income Taxes Goods and Services Goods and Services Businesses Households Goods and Services Payments Product Markets Payments $$

30. The Circular Flow Diagram • Four key markets coordinate the circular flow of income. • 1. the resource market coordinates demand for factors of production between businesses and households. 2. The goods & services marketcoordinates the demand for output between businesses and households. 3. The loanable funds marketdirects household and foreign investments to business and government borrowers . 4. The foreign exchange market coordinates demand for currencies for export/import transactions

31. Another Circular Flow

32. Government Involvement in the Circular Flow With Households: It Provides: Legal Framework Infrastructure Security It Gets: Taxes

33. Government Involvement in the Circular Flow With Businesses: It Provides: Legal Framework Infrastructure Security It Gets: Taxes

34. Government Involvement in the Circular Flow With Factor Markets: It Provides: Legal Framework Infrastructure Security Factor Payments It Gets: Factors of Production

35. Government Involvement in the Circular Flow With Product Markets: It Provides: Legal Framework Infrastructure Revenue Payments It Gets: Goods and Services

36. The Invisible Hand Market prices direct individuals pursuing their own interests to produce good that will benefit society

37. The US System 1. Adam Smith’s The Wealth of Nations (new theory) The best way to increase the wealth of a country is through individual decision making with minimal government influence. Laissez faire (old theory) Mercantilism – government formed economic policy. -It granted charters for colonies to produce certain goods (new)

38. The US System 2. Industrial Revolution a. Inventions made large-scale production possible. + mass production, factory system - long hours, poor working conditions b. Creates a need for inputs and a need for markets

39. The US System 3. US Development a. Growth in transportation and communications opened new markets b. Electricity and oil allowed for mass production • New goods were invented -typewriters, light bulbs, automobile, new farm machinery

40. The US System d. Problems developed 1. Large businesses became monopolies and trusts • Living conditions became harsh -long hours, low wages, slums, child labor 3. Government Response • Anti-trust legislation - FTC, Food and Drug Act, Sherman Anti-Trust Act b. Movement away from laissez faire

41. The US System 4. The Great Depression a. Problems of the 20’s. - production for WWI not needed any longer - tariffs eliminated markets - farmers were overproducing - unemployment rising - inside of the Production Possibilities Curve b. Creates a need for inputs and a need for markets

42. The US System b. The government took action - farmers paid not to grow - government work projects set up - Social Security created - FDIC - Employment Act of 1946 Government required to take action: - full employment - full production - stable prices

43. The US System c. Recent Trends - Reagan and Carter - deregulation - Reagan and Bushes – large deficits - Clinton – balance budget, sex - George W. – tax cuts, large deficits

44. True or False? 1. Highly-developed economies must make the basic economic choices, whereas less-developed economies produce so little that no choices are possible. 2. Price is the language through which buyers and sellers communicate their intentions to one another in a pure market economy. 3. Households buy goods and services in output markets and sell factors of production in input markets. 4. The least-cost method of production is the method that uses resources most efficiently. 5. The value judgments of persons running households and businesses play virtually no role in economic decision making in a pure market economy.

45. 6. In a planned economy, economic decisions are made by individual buyers and sellers. • 7. A lack of incentives to protect the environment is a weakness of both market economies and planned economies. • 8. In a socialist economy, goods and services go only to those who can pay for them with money earned from resources they own. • A socialist system favors collective ownership of society's factors of production. • There is no difference between a market economy and a planned economy in how income is distributed • 11. Scarcity is a problem in a market economy but not a planned economy.

46. The invisible hand doctrine was Adam Smith's idea that allowing competing sellers to act in their own best interests advances the economic interests of all society. • The Sherman and Clayton Acts were passed to help maintain U.S. laborers’ living and working conditions. • The Employment Act of 1946 gave the federal government the right and responsibility to provide an environment for the achievement of full employment, full production, and price stability. 15. Over the years, government's intervention in the economy has increased, but the increase has not been smooth or continuous.