Economic Systems and the American Economy* Chapter 2 Economic Systems and the American Economy* *Ch. 2 explains or describes how economic systems answer basic questions about production and distribution of goods and services, how economic systems differ; and what constitutes the major characteristics of the United States market economy.

Section 2 Economic Systems* * The way that each individual lives in a society is based on how the country handles problems and questions involving their economy. These are issues dealing with inflation, consumer needs, and so forth.

Define economic system

Way in which a nation uses its resources to satisfy its people’s needs and wants* * When it comes to an economy, there are three basic economic questions that each must answer.

What three questions must all economic systems answer?

What should be produced?* How should it be produced?* For whom should it be produced?* *Use guns vs. butter example.. *Who will get the job done? * The way that a country handles these questions is based on their economic system. An economic system is basically the decision making that is done to answer these questions *Who receives the new goods?

Does a pure economic system really exist?

No- they are all mixed economies to some degree

What are the major types of economic systems and their differences?

Traditional Command Market Mixed* *

Define traditional economy

System in which economic decisions are based on customs and beliefs that have been handed down from generation to generation* *A traditional economy is an economy that answers the three questions based on their social customs and how the society has dealt with these questions in the past. A country's customs can differ greatly to that of a neighboring country so traditional economies vary from one another.

Answers the three basic questions according to tradition Traditional Answers the three basic questions according to tradition Things are done, “the way they have always been done.” Economic decisions are based on customs and beliefs-often religious- handed down from generation to generation*

San of the Kalahari in Africa Aborigines of Australia Traditional Examples Inuit of North America San of the Kalahari in Africa Aborigines of Australia

Everyone knows their role Traditional Advantages: Everyone knows their role Little uncertainty of what and how to produce, for whom is usually themselves

Discourages new ideas/technology Punishes people who break rules Traditional Disadvantages: Discourages new ideas/technology Punishes people who break rules Lower standard of living

Define command economy

System in which the government controls the factors of production and makes all decisions about their use* *A command economy is an economy where these questions are all answered by the government. Rather than giving indviduals the chance to decide what they want or need, the government decides these questions for the country. This type of economy is difficult for the individual because it is impossible for the government to know exactly what is best for each and every citizen.

Government decides questions of production Command Government decides questions of production Example: Former USSR , Cuba, North Korea, and China

Speed in which resources can be rerouted (agriculture to industry) Command Advantages: Speed in which resources can be rerouted (agriculture to industry) Little uncertainty-decisions made for you Some education, healthcare, public services, available at little or no cost

Not designed for customer wants-basic needs provided Command Disadvantages: Not designed for customer wants-basic needs provided Sacrifice for the good of the state and benefit for future generations

No incentive to work hard-just enough to fill quota Command Disadvantages: No incentive to work hard-just enough to fill quota Large bureaucracy

Little flexibility-discourages change Command Disadvantages: Little flexibility-discourages change Individual abilities not considered* *command economies don't help with their workers' motivation because everyone is given the same amount of goods and the same standard of living. A hard working citizen would not be given a chance to benefit from their extra work because they cannot increase their standard of living any greater than it currently is and they will make just as much as a person who exerts little or no effort.

Define market system

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* *A market economy is the type of economy that the United States has and these questions are answered in the marketplace by the interaction of buyers and sellers. For example, the question of what to produce may be based on what trend is popular right now. The producer would create a product that they think would sell well to the public in hopes to make a profit. The question of how to produce is usually based on the producer's choice. They might decide to produce a product with more workers or they might decide to produce it more with machines and computers to save on labor costs. The question involving for whom to produce is based on the buyer who decides what they want or need and what price they are willing to pay for it.

People and firms act in their own best interests Market People and firms act in their own best interests Allow buyers/sellers to come together to exchange goods or services Ex. U.S., Japan, Germany

Define market

Freely chosen activity between buyers and sellers of goods and services

Over time can adjust to change Individual freedom Market Advantages: Over time can adjust to change Individual freedom Little government interference Decentralized decision making

Variety of goods and services High consumer satisfaction Market Advantages: Variety of goods and services High consumer satisfaction Freedom to chose career, spend their income how they wish, own private property, take risks and earn profits

Define circular flow of economic activity

Economic model that pictures income as flowing continuously between businesses and consumers

Doesn’t provide for basic needs of all members Market Disadvantages: Doesn’t provide for basic needs of all members Doesn’t provide enough services people highly value* * Education, healthcare

High degree of uncertainty for workers and business Market Disadvantages: High degree of uncertainty for workers and business

Market Disadvantages: Can fail if three conditions are not met Reasonably competitive markets Resources able to move from one activity to another Consumer access to information to make wise choices Government helps to ensure these* * A market economy is great for motivating workers to work harder because they are only paid based on what they do. A worker can increase their income or profit by working harder and this chance to profit motivates them.

Define mixed economy

System combining characteristics of more than one type of economy* * A mixed economy is an economic system that answers the three questions both in the marketplace and in the government. Although the United States government plays a role in our economy, a mixed economy usually involves producers working closer with the government than they do in the United States so the US economic system is still a market economy.

Mixed Combines the basic elements of a pure market economy and a command economy

Characteristics of the American Economy* Section 2 Characteristics of the American Economy* *Section 2 explains or describes the major components of a market economic system and how they apply to the American free enterprise system.

Identify and explain the six major characteristics of a pure market economy?

The six characteristics of a pure market economy Little or no government control Freedom of enterprise Freedom of choice Private property The profit incentive Competition

Explain why a pure market economic system Requires little or no government control.

Limited Role of Government Adam Smith: Described a system in which government had little to do with a nations economic activity

Limited Role of Government Stated that individuals left on their own would work for their own self-interest They would then be guided by an “invisible hand” to use resources efficiently and thus achieve the maximum good for society

Identify the term used to explain Smith’s version of the ideal economic system.

Capitalism

Define capitalism

Economic system in which private individuals own the factors of production and decide how to use them within legislated limits

The government lets people and businesses make their own economic decisions w/o government constraints

Identify the other term used for pure capitalism.

Laissez-faire system

Define laissez-faire

Economic system in which the government minimizes its interference with the economy

Limited Role of Government Since the 1880’s, the role of government-federal, state, and local-has increased

Explain how the government’s role over the economy has increased since the 1880’s

Federal agencies regulate the quality of various foods and drugs, watch over the nation’s money, and banking system, inspect workplaces for hazardous conditions, and guard against damage to the environment

The federal government also uses tax revenues to provide social programs such as Social Security and Medicare State and local government have expanded their roles in such areas as education, job training, recreation, and care for the elderly.

The American economy is also called a free enterprise system Freedom of Enterprise The American economy is also called a free enterprise system

Define 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

Explain how the government restricts free enterprise.

All limit free-enterprise to protect you Freedom of Enterprise Zoning regulations, child-labor laws , hazardous waste disposal rules, and other regulations All limit free-enterprise to protect you

Buyers, not sellers, make the decisions about what should be produced Freedom of Choice Buyers, not sellers, make the decisions about what should be produced

Profit Incentive When a person invests time, know-how, money, and other capital resources in a business, the goal is to make a profit The desire of profit incentive motivates entrepreneurs to establish new business and produce new kinds of goods and servicesw

One of the most important characteristics of capitalism Private Property One of the most important characteristics of capitalism

Define private property

Whatever is owned by individuals rather than by government

Define profit

Money left after all the costs of production-wages, rents, interests, and taxes-have been paid

Define profit incentive

Desire to make a money that motivates people to produce and sell goods and services

Describe the rights of property.

The rights of humans to risk investment, own and produce assets, learn new ways of producing, and enjoy the benefits if these choices result in profits

Encouraged by the lure of profits Competition Encouraged by the lure of profits Leads to an efficient use of resources Forces businesses to keep their production costs as low as possible For competition to exist, barriers to enter and exit from industries must be weak

Define competition

Rivalry among producers or sellers of similar goods and services to win more business

Section 3 The Goals of the Nation Section 3 explains or describes the major goals of the United States economy and the benefits and responsibilities of individuals in a free enterprise system.

Identify the goals of free enterprise.

Goals of free enterprise Economic Freedom Economic Efficiency Economic Equity Economic Security Economic Stability Economic Growth

Goal: To allow each member of society to make choices Economic Freedom Goal: To allow each member of society to make choices

Which country has the highest degree of economic freedom?

United States of America

Identify the consequences of economic freedom.

If a business fails, the government won’t help out

Wise use of available resources so that costs do not exceed benefits Economic Efficiency Wise use of available resources so that costs do not exceed benefits We must always be watchful that the costs of our economic actions do not exceed the benefits

Economic Equity The attempt to balance an economic policy so that everyone benefits faily

Security is provided through a number of government social programs Economic Security Security is provided through a number of government social programs

Goal: To reduce the extreme ups and downs in the standard of living Economic Stability Goal: To reduce the extreme ups and downs in the standard of living The standard of living is measured by the average value of goods and services used by the average citizen during a given period of time

Define standard of living

The material well-being of an individual, group, or nation measured by how well their necessities and luxuries are satisfied

Expansion of the economy to produce more goods, jobs, and wealth Economic Growth Expansion of the economy to produce more goods, jobs, and wealth

What is required to for a nation to achieve economic goals?

Trade-offs

Explain the responsibilities associated with a well-functioning free enterprise system.

Individual responsibilities Ability to support yourself and your family Responsibility to use your education in a reasonable manner that helps you become a productive member of the free enterprise system

Individual responsibilities Individuals have the responsibility of electing responsible government officials