AIM: Which economic system offers the most stability and prosperity? BELLWORK: 1) What are the 3 economic questions 2) What is an entrepreneur? 3) If you were an entrepreneur, give me a business plan and tell me how you would answer the 3 economic questions for your business

Economic Systems

 There are three basic economic systems: –Traditional Economy –Command Economy –Market Economy

Traditional Economy  A traditional economy exists when all economic activities are based on traditions and customs.  Individuals are not free to make decisions based on what they want or would like to have. Their roles are defined by the customs of their ancestors.

Command Economy A command economy exists when a central authority makes most of the “what”, “how”, and “for whom” decisions. A command economy exists when a central authority makes most of the “what”, “how”, and “for whom” decisions. North Korea, Cuba, People’s Republic of China, and the former USSR are examples of command economies. North Korea, Cuba, People’s Republic of China, and the former USSR are examples of command economies.

The US Economic System  While the United States does allow free competition, the government oversees the operations of businesses and watches over the economy. Because of this, the government may interfere in free competition and regulate the economy at certain times. Because of this, the government may interfere in free competition and regulate the economy at certain times. This is why the United States is considered to be a mixed economy. This is why the United States is considered to be a mixed economy.

Market Economy  A market economy exists when people and firms act in their own best interests to answer the “what”, “how”, and “for whom” decisions.  The United States is an example of a market economy.

The “Seven” Golden Goals Americans are constantly seeking seven economic goals: 1. Economic Freedom: People place a high value on their freedom to make their own economic decisions. 2. Economic Efficiency: Resources are scare and that factors of production must be used wisely. 3. Economic Equality: Equal pay for equal work. 4. Economic Security: Protection from severe economic events such as layoffs and illnesses. Social Security- a federal program of disability and retirement benefits that covers most working people.Social Security- a federal program of disability and retirement benefits that covers most working people. 5. Full Employment: people want their economic system to provide as many jobs as possible. 6. Price Stability: People with fixed incomes are greatly hurt by inflation (a rise in the general level of prices). 7. Economic Growth: Growth is needed so that people can have more goods and services in the future.

Capitalism Capitalism is a system in which private citizens own the factors of production. Capitalism and free enterprise are used to describe the US economy.

Characteristics of Free Enterprise and Capitalism 1. Economic Freedom People may choose their jobs and how to spend their money. People may choose their jobs and how to spend their money. 2. Voluntary Exchange Buyers and sellers may engage freely in market transactions. Buyers and sellers may engage freely in market transactions. 3. Private Property People may control their possessions as they wish. People may control their possessions as they wish. 4. Profit Motive People may improve their material well-being by making money. People may improve their material well-being by making money.

Economic Institutions and Business Organizations

Sole Proprietorship  A sole proprietorship is a business owned and run by one person. EX: opening up your own pizzeria. EX: opening up your own pizzeria.

Sole Proprietorships PPPPositives: Easy to start. Decisions can be made quickly. Owner has flexibility and freedom. Profits do not have to be shared. Does not have to pay business income taxes because the business is not recognized as a separate legal entity. Easy to get out of the business if the owner decides to.

Sole Proprietorships  Negatives: The owner has unlimited liability. The owner is fully responsible for all loses and debts. The owner has unlimited liability. The owner is fully responsible for all loses and debts. It is difficult in raising financial capital. It is difficult in raising financial capital. It is limited in size. It is limited in size. The proprietor often has limited managerial experience. The proprietor often has limited managerial experience. Difficultly in finding qualified employees. Difficultly in finding qualified employees. There is limited life. There is limited life.

Partnership  A partnership is a business jointly owned by two or more persons. EX: You and your friend open up your own deli. EX: You and your friend open up your own deli. General Partnership:General Partnership: all partners are responsible for the management and financial obligations of the business. all partners are responsible for the management and financial obligations of the business. Limited Partnership:Limited Partnership: At least one partner is not active in the daily running of the business. At least one partner is not active in the daily running of the business.

Partnership  Positives: It is easy to establish. It is easy to establish. Each partner brings different ideas to the business. Each partner brings different ideas to the business. There are no special taxes. There are no special taxes. Can usually attract more capital than proprietorships. Can usually attract more capital than proprietorships. Larger in size than proprietorships. Larger in size than proprietorships. Easier to get talent than proprietorships. Easier to get talent than proprietorships.

Partnership  Negatives: Each partner is fully responsible for the acts of the other partners. Each partner is fully responsible for the acts of the other partners. It has limited life. When a partner dies, quits, or a new partner is added, the original firm legally dies. It has limited life. When a partner dies, quits, or a new partner is added, the original firm legally dies. Conflicts can arise between partners. Conflicts can arise between partners.

Corporation  A corporation is a business organization recognized by law as a separate legal entity having all the rights of an individual. EX: Toys R Us; Home Depot EX: Toys R Us; Home Depot  To form a corporation (to incorporate), you must get permission from the nation or state government. When it is approved, a charter is granted.

The Charter  The charter specifies the number of shares of stock that exist. Shares are certificates of ownership and are sold to investors (shareholders // stockholders). Common Stock: Common Stock: The basic ownership of a corporation. They receive one vote for each share of stock owned. They vote for the board of directors.The basic ownership of a corporation. They receive one vote for each share of stock owned. They vote for the board of directors. Preferred Stock: Preferred Stock: These are nonvoting ownership of a corporation. They receive dividends (payments) before common stockholders. If a company goes out of business, they get paid first.These are nonvoting ownership of a corporation. They receive dividends (payments) before common stockholders. If a company goes out of business, they get paid first.

Corporation  Positives: Easy to raise capital (sell stocks or issue bonds). Easy to raise capital (sell stocks or issue bonds). Directors of the corporation can hire the best management. Directors of the corporation can hire the best management. It has limited liability of its owners. Owners only lose how much money they invest. It has limited liability of its owners. Owners only lose how much money they invest. It has unlimited life. It has unlimited life. It is easy to transfer owners. It is easy to transfer owners.

Corporation  Negatives: It is difficult to get a charter. It is difficult to get a charter. Its owners have little say in how a business should operate. Its owners have little say in how a business should operate. It pays income taxes just like private individuals. It pays income taxes just like private individuals. Subject to more government regulation than sole proprietorship. It is regulated by the Securities and Exchange Commission (SEC). Subject to more government regulation than sole proprietorship. It is regulated by the Securities and Exchange Commission (SEC).

Nonprofit Organizations  A Nonprofit Organization (NPO) is an economic institution that operates like a business but does not seek financial gains. EX: Schools, churches, community service organizations EX: Schools, churches, community service organizations

Franchise  A franchise is a legal relationship between the owner of a trademark or advertising symbol and an individual wishing to use that identification in a business.  Each franchise has been authorized by a parent company, or franchisor, to sell their goods and services.  A franchisee sells goods supplied by the franchisor.  Franchises tend to be more successful than sole proprietorships because in a franchise operation, the franchisor provides business expertise (marketing, advertising plans, management guidance, financing assistance).