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Economic Objectives and Economic Systems

AS Economics

Aims and Objectives

Aim Understand economic objectives and economic systems. Objectives Define different agents objectives in an economy. Describe how these objective are competing. Analyse different types of economic systems.

Economic Objectives
Economic Objectives
2. Workers
3. Firms

1. Consumers

4. Governments

List the things List the List the List the you want from things you things you things you an economy, want from an want from an and things you want from an economy, need from an economy and economy, the things and things and things economy. You you needs may wish to you need you need from an consider from an from an economy. profits, economy. economy. investments. E.g. Taxes

Consumers Maximise economic welfare. Range of choice of products and services Competitive environment

Workers Maximise gains from working. I.e. wages Benefits such as company cars Good working conditions. Maximise economic welfare.

Firms Maximise profits. Maximise returns on investment.

Governments Objectives not always shared with all economic agents. Political objectives influence decisions. Allocate resources efficiently.

New High Speed Train Line

A new high speed train line is planned to be built from Leeds to London. It would mean the creation of a new line and state of the art station which would include a In groups of economic agents, new shopping centre. form an argument considering However it would result in your objectives, as to whether the demolition of the or not this should go ahead. villages of Barton Le Clay Consider residents of the areas and Toddington. opinions.

Conflicts Between Agents

Economic agents often have different, conflicting opinions and objectives.

Decisions about the allocation of resources will need to take into account these objectives and conflicts. Whether the government intervenes to allocate resources depends on the economic system.

Berlin Wall 1989 Signalled the end of Communism

Command/Planned Economy
Resources are allocated by the command mechanism (i.e. the government). All decisions about what and how much and who should produce goods/services are taken by government. Only exist in a dictatorship government. Consumers had to queue to buy goods, whose prices were fixed by governments, resulting in shortages and poor quality goods. Command economies broke down. Still exist: China, North Korea, Cuba.

Market Economy
Resources are allocated by the price mechanism and market forces. Allocates scarce resources among competing uses. Market could be anything from a street market, to buying goods and services online, to markets such as eBay! One example would be labour, exchanged for cash, as different prices.

Prices andPrices Profits inand Free Market Profits Economy Scarce resources achieve high prices. E.g. Diamonds
Prices and profits have three key functions: 1. Incentive function 2. Rationing function 3. Signalling function

Prices and Profits in Free Market Economy Prices and Profits When prices rise: Consumers tend to ration their demand. Sends a signal to producers that there is a scarcity or shortage. Creates an incentive for suppliers to increase supply as more profit is potentially available.

Prices and Profits in Free Market Economy Prices and Profits When prices fall: Consumers increase their demand, end to rationing. A signal is sent to producers that there is too much supply and scarcity falls.

Creates an incentive for producers who see profits falling to leave the market.

As oil prices increase, motorists would spend more money on petrol and be tempted to ration the amount of journeys, cutting demand for petrol. Oil companies are incentivised to increase supply by developing oil fields. High market price has signalled new firms should enter the markets.
100 80 US('90)/bbl 60 40 20 0 1970 1980 1990 2000 2010 2020

Cuban Economy, changing for the better?

Talking Points
What were the problems being experienced in Cubas command economy? Why might small changes be happening to Cubas economy? What may be the benefits and drawbacks of Cuba changing from a command to a market economy?