Economic Systems 2.1

Economic Systems: Different economic systems have evolved in response to the problem of scarcity. Economic system: A method used by a society to produce and distribute goods and services. Which economic system a society employs depends on that society’s goals and values.

3 Basic Questions: 1. What goods and services should be produced? 2. How should these goods and services be produced? (electricity produced by oil or water) 3.Who consumes these goods and services?

Traditional Economy: Traditional economies: Relies on habit, custom, or rituals to decide what to produce, how to produce it, and whom to distribute it to. (ex: African bush tribes and Amish communities.)

Market Economy: Market economies: economic decisions are made by individuals and are based on exchange or trade. (Also called free markets, or capitalism.) Market: voluntary exchange of goods and services between buyers and sellers.

Command Economy: Command economies: (centrally planned economy) The central government alone decides how to answer all three key economic questions. Ex: North Korea and China are considered command economies.

Problems of a Centrally Planned Economy: Performance almost always falls short. Generally cannot meet consumers needs or wants. Since government controls all factors of production, workers lack incentive to work hard. Fears change.

Mixed Economy: Mixed Economies: a combination of traditional, market, and centrally planned economies. Most modern economies are considered mixed economies.

Characteristics of the American Economy: 2.2

Limited Role of Government: Adam Smith, an early economist, believed if left alone, the market would regulate itself. Smith’s ideal economic system is called capitalism. Sometimes, capitalism is referred to as the Laissez-faire system. (let people do as they please.)

Smith’s ideas influenced the founders of the United States. (small government) Over the years, the role of government has increased greatly. Safety Nets: social security, unemployment, welfare, are all social programs that protect American citizens.

Freedom of Enterprise: -Capitalism is also called the free enterprise system. -This term emphasizes that individuals are free to own and control the factors of production. -Free to make money, or free to fail. -Government does place legal restrictions on businesses.

Freedom of Choice: -Buyers, not sellers, make decisions about what should be produced. -Success or failure of a good or service depends on individuals freely choosing what they want to buy. *Government sets safety standards for goods and services.

Profit Incentive: Profit: The money left over after all the costs of production has been paid. Profit incentive: or profit motive, is the desire that motivates entrepreneurs to establish new businesses. -This leads to a more efficient economy, because non-efficient businesses will go out of business.

Private Property: Private property: Property that is held by individuals or groups, rather than by the government. -You as an individual are free to buy whatever you can afford. -You also have the right to control how, when, and by whom your property is used. * Protected in the Constitution.

Competition: Competition: The rivalry among producers of similar products to win more business by offering lower prices. Competition leads to efficient use of resources by businesses, because it forces businesses to keep the cost of production low.