Economic Systems and the American Economy Chapter 2

Learning Objective I can describe the 3 basic questions that all economics systems attempt to answer

Three Basic Questions Economic System The way a nation determines how to use its resources to satisfy its people’s needs and wants What Should Be Produced? How Should It Be Produced? For Whom Should It Be Produced?

Learning Objective I can identify advantages and disadvantages of traditional, market, command, and mixed economic systems.

Types of Economic Systems Traditional System Command System Market System Mixed System

Traditional Questions answered by how they have been done in past. (often religious) Advantages – Expectations Known – Strong Community Disadvantages – Change Discouraged (punished) – Inefficient Productions – Limited Consumer Choices – Little Increase in Standard of Living

Command Government leaders control FOP and make all decisions (single person or central group) Disadvantages Lack of Incentives Limited Consumer Choices Advantages Quick Changes Possible Necessities at Little or No Cost

Market Individuals own FOP and therefore make all decisions. Market – Voluntary Exchange of Goods and Ideas Prices combination between buyers and sellers. Tells what to buy and produce. Circular Flow of Income and Output

Market Cont. Advantages – Freedoms Career How to Spend Income Property Ownership Whether to Take Risks – Lots of Choices in Goods Due to Competition – Supply and Demand determine prices Disadvantages – No concern over elderly, disabled, or too young to work. – Change is Gradual

Mixed Combines elements of Pure Market and Command. Individual decision making and private ownership ALONG WITH government intervention and regulation.

Characteristics of the American Economy Limited Role of Government Freedom of Enterprise Freedom of Choice Profit Incentive Competition Private Property

Limited Role of Government Adam Smith (1776) An Inquiry into the Nature and Causes of the Wealth of Nations – Invisible Hand Pure Capitalism (Market) – Laissez-Faire – Let people do as they choose. U.S. – Let People Own Businesses and Industries BUT Must Operate Within Legislative Limits.

Freedom of Enterprise Private ownership of property and businesses. Entrepreneurship – YOU TAKE THE RISK Within Certain Limits However Zoning Regulations Child Labor Laws Consumer Protection Agencies

Freedom of Choice Buyers (not sellers) make decisions about what to produce Government Intervention Sets Safety Standards Regulates Prices (under limited competiton)

Profit Incentive Desire to Make a Profit Provides motivation to improve, make better Losses? Signal to move elsewhere.

Competition Requires large number of independent sellers Encourages Efficiency Keep Prices Low to Sell But High Enough for Profits Must Keep Low Production Costs Must have little stopping entering and exiting

Private Property Individual right to buy property whenever you want. Individual controls how and when to use property. Constitution guarantees an owner’s right to private property and its use

Goals of Free Enterprise Economic Freedom Efficiency Equity Security Stability Growth

Economic Freedom Free to Make Choices Start own Businesses Own Private Property Where and When to Work Must Accept Consequences

Economic Efficiency Using Limited Resources Wisely Scarcity a Problem

Economic Equity Fairness Lawmakers pass wage laws Discrimination laws

Economic Security Protection against things beyond our control Work Related Injuries Natural Disasters Bank Failure Old Age

Economic Stability Reduce ups and downs of Standard Of Living- material well- being of individual, group, or nation. Measured by average value of goods and services used by average citizen during given period of time. We have more enjoying highest SOL than anywhere in world.

Economic Growth Producing more goods and services over long term Must happen WHY???

Rights and Responsibilities Rights Enter any job or profession you want Can work as hard as you want Buy what you want Responsibilities Ability to support you and family Become a productive member of Free Enterprise Electing responsible officials: Need knowledge of policies Ability to analyze consequences of policies

Pure Socialism Government manages Production and Distribution – North Korea, Cuba Karl Marx – Bourgeoisie vs. Proletariat Value of Goods Depends on How Much Labor Went Into Production Bourgeoisie used Proletariat unfairly Used their labor then kept profits Capitalism was doomed to fail Would evolve into Socialism then Communism – System with no need for government Irony: Today came to mean authoritarian system that supports revolution to gain power. Proletariat actually has little to no power

Characteristics of Pure Socialism Prices set by State – Not by Supply and Demand Movement or Resources (especially Labor) Controlled by the State Most Factors of Production Owned by the State. Private Property Limited to Tools Needed for Occupation Risk Taking Not Permitted. State Takes All Risks. Citizens Share in Unsuccessful Risks. What, How, and for Whom to Produce Made by State Officials

4 Steps in Change to Socialism 1. Extreme Recessions and Depression - Only A Few Wealthy Would Emerge 2. Income Gap Causes Poor Workers to Revolt 3. New System Established - Workers Own Businesses (Through The State) 4. Evolve to Pure Communism – Workers contribute and only take what they need

Socialism Since Marx Democratic Socialism – Election of Socialists to Political Office Government Controls Some Areas of Economy Authoritarian Socialism – Revolution to Overthrow Capitalism. Central Government Controls Entire Economy

Benefits of Capitalism Personal Freedom and Initiative Socialism: Total Government Interference Marketplace Efficient – Allows for Growth Socialism: Growth Stagnant

Planned Economies ALL ECONOMIES ARE PLANNED Difference is who is doing the planning: Socialism: Government Does the Planning Capitalism: Individuals, Businesses, Elected Officials do the planning Problems with Capitalism: Income Inequality Lacks enough Public Assistance (socialism offers)