Chapter 2 Economic Systems & the American Economy

Economic Systems Economic system – way in which a nation uses its resources to satisfy its people’s needs and wants

3 Basic ?s of Economic Systems What should be produced? If one item is produced, then less of something else must be produced. How should it be produced? What labor, capital goods, and factors of production will be used? For whom should it be produced? How will goods be distributed? Price system, majority rule, 1st come-1st served, sharing equally or military force

Types of Economic Systems Traditional System Command (controlled) System Market (capitalist) Mixed System

Traditional System Traditional economy – system in which economic decisions are based on customs and beliefs that have been handed down from generation to generation Trades and work learned from parents Know what is expected of you Change discouraged or punished Production inefficient and choice of goods is rare Examples – Eskimos, Aborigines & Amish?

Command System Command economy – system in which the government controls the factors of production and makes all decisions about their use Government decides what to produce & how it will be distributed Government guides people into certain jobs Lack of incentive to work hard, few choices, limited efficiency or inventiveness North Korea & China (changing)

Market System Market economy – system in which individuals own the factors of production and make economic decisions through free interaction while looking out for their own and their families’ best interests Limited government, individuals control factors of production and economy driven by market price

Market System Market – freely chosen activity between buyers and sellers of goods and services Circular flow of economic activity – economic model that pictures income as flowing continuously between businesses and consumers Advantages – free to choose career and how to spend $, own private property, take risks, & many goods for purchase Disadvantages – How to provide for elderly, young & sick

Mixed System Mixed economy – system combining characteristics of more than one type of economy Most countries have a mixed economy Most individuals make decisions but are regulated to various extents by the government

Characteristics of the American Economy Freedom of choice – can choose to produce or not produce or to buy or not to buy 6 Characteristics of a pure market system 1. Little or no government control 2. Freedom of enterprise 3. Freedom of choice 4. Private property 5. Profit incentive 6. Competition

Characteristics of the American Economy Limited role of government Adam Smith – founder of modern economics - Wealth of Nations – people will use resources efficiently to achieve the maximum good for society Capitalism – economic system in which private individuals own the factors of production & decide how to use them within legislated limits Laissez-faire – pure capitalism – economic system in which the government minimizes its interference with the economy Government has increased its role since the 1880s

Characteristics of the American Economy Freedom of enterprise Free enterprise system – economic system in which individuals own the factors of production and decide how to use them within legal limits; same as capitalism Regulations – zoning, child labor, pollution & taxes – examples May make money or may lose money Freedom of choice Buyers, not sellers, make decisions about what is to be produced Government influences the market to protect consumers – safety standards & price controls

Characteristics of the American Economy Profit Incentive Profit – money left after all the costs of production have been paid – wages, bills & taxes Profit incentive – desire to make money that motivates people to produce and sell goods and services

Characteristics of the American Economy Private Property Private property – whatever is owned by individuals rather than by government Constitution guarantees an owner’s right to private property and its use (eminent domain) Competition Competition – rivalry among producers and sellers of similar goods and services to win more business Leads to lower prices, better quality and an efficient use of resources Low barriers to entry are needed

The Goals of the Nation Goals of free enterprise in the U.S. Economic freedom – allows members of society to make choices and possibly fail Economic efficiency – wise use of available resources so that costs do not exceed benefits Economic equity – attempt to balance an economic policy so that everyone benefits fairly – (equal pay, hiring practices & disabled)

The Goals of the Nation Economic security – protection against accidents, natural disasters, bank failures etc. Economic stability – reduce extreme ups & downs in standard of living Standard of living – the material well-being of an individual, group, or nation measured by how well their necessities and luxuries are satisfied Economic growth – expansion of the economy to produce more goods, jobs and wealth Trade-Offs among goals – limits on what you can do with resources due to scarcity (Social Security)

The Goals of the Nation Rights & Responsibilities Right to enter any profession or business you want Right to work very little or a lot Right to buy what you want Need to support yourself and your family Need to be a productive member of society Need to have responsible government