Chapter 2 Economic Systems and the American Economy

Section 2-1: Economic Systems Economic System: way in which a nation uses its resources to satisfy its people’s wants and needs Three Basic Questions all nations have to answer (businesses too)  What goods and services should be produced?  How should they be produced?  Who will get the goods and how will they be distributed?

Types of Economic Systems Traditional economy : based on habit, customs and religious tradition -passed down for generations Children take on the profession of their parents Command economy (also called directed): government leaders answer the three basic questions  Individuals have little economic freedom  Few consumer goods are available

Market/Capital economy: individuals make the decisions  Market: voluntary exchange of goods and services between buyers and sellers

Businesses Consumers Income Payments $ (Wages, Rent, Interest, Profit) $ (1) Productive Resources (Labor, Land, Capital, Management) (2) Goods and Services (3) $ Consumer Expenditures $ (4) Circular flow of economic activity: income flows continuously between business and consumers

Mixed economy: combination of three pure economic systems-all economies are really mixed

Section 2-2: Characteristics of the American Economy Limited Role of Government  Capitalism: economic system in which private individuals own the factors of production Pure capitalism can be referred to as a laissez-faire system  Laissez-faire: a system where government limits its interference with the economy (means to let alone)

Freedom of Enterprise  Individuals can own and control the factors of production  No guarantee of success  Governments place restrictions on some things ( child labor laws, special licensing, zoning laws, etc.)

Freedom of Choice  Consumers decide what is produced by buying it or not buying it (you vote for products you like)  Demand determines what is produced -If a product doesn’t sell, the company looses money  Government sets safety standards  Government regulates price in some industries (ex. utility companies)

Profit Incentive  People produce goods to make a profit- money left after costs of production are paid (ex. Wages, rent, taxes, etc)  Losses are a sign of inefficient use of resources-forces businesses to change in order to make a profit Private Property  Private property is property held by individuals or groups  Individuals control how property is used- want to make a the best profit

Competition  Competing businesses try to win customers with lower prices or better quality goods and services  Businesses need to use resources efficiently to stay competitive (prices have to be low enough to attract buyers yet high enough to make a profit)  In the U.S., most industries have weak barriers to enter but some (ex. Becoming a doctor) are more difficult

Section 2-3: Goals of the Nation Goals of Free Enterprise  1) Economic Freedom: allowing people to make their own decisions on what to purchase  2) Economic Efficiency: making the best use of your limited resources (land, labor, capital, Entrepreneurship)  3) Economic Equity: Laws regarding the economy should be fair-everyone has the right to earn an income or to invest  4) Security: Government sets up social program to help people attain basic needs in case of hardship CONT..

 5) Economic Stability: few ups and downs in the economy Tries to stop: Inflation: rise in the average cost of goods and services without an increase in wages- dollar loses value  Especially hard on people with fixed incomes, retired, lenders of money Deflation: average prices fall- causes unemployment- waste of economic resources  6) Economic growth: growth of the economy as technology and education increase- we are able to acquire more goods and services than previous generations

Rights and responsibilities  People have the right to do what they want within the law (enter any profession you like, work a little or a lot, buy what you want)  People have to behave responsibly in order for the system to work (support yourself and your family)  People are responsible for electing good government officials