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 Economic System Answers 3 Questions What Should 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 Disadvantages – Change Discouraged (punished) – Limited Consumer Choices

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

Market Individuals own FOP and therefore make all decisions. Market –

Market Cont. Advantages – Freedoms Career Property Ownership – Lots of Choices in Goods Due to Competition Disadvantages – No concern over elderly, disabled, or too young to work.

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

Learning Objective I can identify and describe characteristics of the American Economy

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 – Pure Capitalism (Market) – Laissez-Faire – U.S. – Let People Own Businesses and Industries BUT

Freedom of Enterprise Private ownership of property and businesses. Entrepreneurship – Within Certain Limits However Zoning Regulations

Freedom of Choice Government Intervention Regulates Prices (under limited competition)

Profit Incentive Desire to Make a Profit Losses? Signal to move elsewhere.

Competition Requires large number of independent sellers But High Enough for Profits Must have little stopping entering and exiting

Private Property Constitution guarantees an owner’s right to private property and its use

Learning Objective I can identify and describe the 6 goals of the American Economy

Goals of Free Enterprise Economic Freedom Efficiency Equity Security Stability Growth

Economic Freedom Free to Make Choices Start own Businesses Must Accept Consequences

Economic Efficiency Scarcity a Problem

Economic Equity Lawmakers pass wage laws Discrimination laws

Economic Security Work Related Injuries Natural Disasters Bank Failure Old Age

Economic Stability 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 Must happen WHY???

Rights and Responsibilities Rights Can work as hard as you want Responsibilities Ability to support you and family Electing responsible officials: Ability to analyze consequences of policies

Learning Objective I can describe both Pure Socialism and Pure Communism

Pure Socialism – North Korea, Cuba – The Communist Manifesto (1848) Bourgeoisie vs. Proletariat History – Struggle between classes Used their labor then kept profits Would evolve into Socialism then Communism – System with no need for government Proletariat actually has little to no power

Characteristics of Pure Socialism Prices set by State – Not by Supply and Demand Most Factors of Production Owned by the State. Private Property Limited to Tools Needed for Occupation What, How, and for Whom to Produce Made by

4 Steps in Change to Socialism 1. Extreme Recessions and Depression - Only A Few Wealthy Would Emerge New System Established - (Through The State) 4. Evolve to Pure Communism –

Socialism Since Marx Democratic Socialism – Government Controls Some Areas of Economy Venezuela Authoritarian Socialism – Central Government Controls Entire Economy North Korea, Cuba

Benefits of Capitalism Socialism: Total Government Interference 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)