Bell Ringer Do all countries have the same economic needs/goals?

Economic Systems and the American Economy Chapter 2

Economic Systems Your goals in life are very different from a teenager who lives in North Korea The reason for this is because you live in a different economic system Economic System: the way of determining how to use resources to satisfy people’s wants and needs

Economic Systems When deciding how to use their resources every economic system must answer three questions: What should be produced? I-Pods versus Macbooks Guns versus Butter How should it be produced? Skilled or unskilled labor Quality versus Quantity For whom should it be produced? Lottery, first-come-first-serve, sharing equally, military force, or individual choice Which of these is the American way?

Economic Systems There are four types of economic systems: Traditional Command (Controlled, Communist) Market (Capitalist) Mixed Can you guess which system is America’s system? NOTE: No “pure” system exists

Economic Systems In a traditional economy the answer to the three questions is “the way it has always been done” Economic decisions are based on traditions, customs, and religious beliefs In this system, you would be the same profession as your father (women are typically housewives) and do it the same way he did Advantage: you know what is expected of you; family ties/values are strong Disadvantage: change is discouraged/punished, methods of production are inefficient, choice is rare Where to find: Inuit tribes, Aborigines in Australia

Economic Systems In a command economy the individual has little influence over the three questions The Government leaders control the factors of production, and therefore the decisions made The government is often one person or a small group (a dictatorship) You would be paid based on what the government wanted to pay you, and in some cases you would do what job they wanted you to do and what schooling you received

Economic Systems There are only a few countries in the world that have a controlled economy today including China, North Korea, and Cuba Advantage: Speed in rerouting resources (switching from civilian to war goods) Disadvantage: lack of incentive to work or show initiative, lack of consumer choices

Economic Systems A pure market economy allows individuals to make decisions for their selves and their families Government does not interfere with economic decisions Individuals own the factors of production and therefore answer the three questions themselves Prices are the guiding force behind how individuals make these decisions

Economic Systems A market is a voluntary exchange of goods and resources between a buyer and seller This occurs anywhere in the world when a government buys oil, a parent hires a babysitter, you buy an I-phone, etc. As prices change, they act as signals to others in the system When the price of gas goes up, it signals that there is a shortage so people should buy less, when it goes down, it means that there is enough for people to buy more The freedom of prices allows the economy to regulate itself over time (doesn’t occur immediately)

Homework Finish Reading Chapter 2, Start Reading Chapter 19 Continue working on Unit 1 Study Guide Begin work on Research Paper

Bell Ringer Is the market economic system better than the command economic system? Why or why not?

Consumer Spending on Goods and Services Economic Systems Consumer Spending on Goods and Services Economists use the circular flow of activity model to show how a market system works Economic decisions are scattered among all participants in the economy Production of Goods/Services Sale or Rent of Resources Payments for Use of Resources (Wages, Interest, Rents, Profits

Economic Systems Advantages of a market economy: freedoms—choose a career, spend or not spend, own private property, take risks for profit competition creates more products at cheaper prices, efficient production of goods Disadvantages of a market economy: Old, young, and disabled would have to rely on family or other individuals for care Difficult to shift from civilian goods to military goods in a hurry

Economic Systems Mixed Economy: combines elements from command and market economies Most countries in the world have a mixed economy The United States is a mixed economy Individuals produce and purchase goods based on wants, needs, and price The government makes laws to protect private property and individuals from bad business practices Individual goals are based around what type of system you live in Government involvement versus individual control determines a society’s economic system

Characteristics of the American Economy A pure market system has 6 characteristics: Little or no government involvement Freedom of enterprise Freedom of choice Private property The profit incentive Competition All of these characteristics are present in the American economy

Characteristics of the American Economy Adam Smith, in his book An Inquiry into the Nature and Causes of the Wealth of Nations, was the first to publish the idea that governments should stay out of the economy If individuals were left on their own they would work for their own self-interest By working for their own self-interest people guide the “invisible hand” of using resources wisely to get the most out of them This is called capitalism Pure capitalism is called laissez-faire meaning “let [people] do [as they choose]” American capitalism is people owning the factors of production and using them within legislated limits

Characteristics of the American Economy How is the government involved in the economy today? Regulate quality of food and drugs Regulate banking and money Inspect hazardous working conditions Protect the environment Issue taxes for Social Security, etc. SEC, ICC, FTC and other oversight organizations

Characteristics of the American Economy Another term for the American economy is free-enterprise system meaning individuals own/control the factors of production If you go into business for yourself, you may become rich, or lose everything The government does restrict where you can open a business, who you can hire, how you can affect the environment, etc.

Characteristics of the American Economy Americans typically get to choose what they buy (freedom of choice) When we don’t buy something, the company stops producing it The government has begun intervening here too— warnings on products, age limits for products, and setting prices when only a few companies produce the product

Characteristics of the American Economy Profit incentive is the willingness to produce goods and services in order to make money Profit is all the money left over after a business’ bills have been paid Failing is a risk that the business owner takes Americans have the right to own private property We choose what we want to do with the property (within legal means)

Characteristics of the American Economy Competition is necessary for the American system How does competition lead to efficient use of resources? Barriers of entrance and exit must be weak Barriers include: taxes, licenses, laws, etc. An example: In order to be a teacher, you must have a teaching license

The Goals of the Nation There are six economic goals of the United States: Economic freedom Economic efficiency Economic equity Economic security Economic stability Economic growth

The Goals of the Nation Economic freedom allows Americans to start businesses, own property, and make their own decisions What economic choices will you be free to make upon graduation? With these decisions come the possibility of failure— typically the government doesn’t help failures

The Goals of the Nation Economic efficiency requires us to use our resources responsibly Example: the cost of gas over the summer averaged more than $4/gallon—this was a sign to the Americans that they needed to reduce consumption of gas or risk using it all up When we reduced our consumption, the price fell down to $1.50-$2 per gallon

The Goals of the Nation Economic equity is desired to make sure all Americans have equal opportunity to be successful (wealthy) This is why there are labor laws for equal pay and laws for equal access to education despite skin color This is not to say that the government is responsible for making sure you make the same amount of money as your neighbor when you work at McDonalds and they work for Lockheed Martin

The Goals of the Nation Economic security is provided by the government with regards to issues that are beyond our control Natural disasters, accidents, old age, bank failures The government helps people by paying Social Security, Unemployment, or through FEMA and the FDIC

The Goals of the Nation America hopes to avoid extreme ups and downs in the 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 The US has one of the highest standards of living in the world

The Goals of the Nation Economic growth is a goal of all nations A country must be able to increase the amount of goods and services produced over time to keep up with expanding populations A trade-off must occur when one of the goals is competing for resources from another goal Politicians must understand the goals and how to most appropriately use resources to get the most out of them

The Goals of the Nation There are many rights that come with being in a free-enterprise system Enter almost any profession you want Open up any business Work a little or work a lot To have these freedoms, there are certain responsibilities Must support yourself/family Must elect responsible government officials

Homework P. 45 #1-2 P. 50 #1-3 Continue working on your Factors of Production Project