THE U.S. ECONOMIC SYSTEM Chapter 5

COMPARING ECONOMIC SYSTEMS Section 5.1

What is Economics? Goods Services Needs Wants Economics - the social science that examines how societies use scarce resources to produce and distribute goods and services that satisfy people’s wants and needs

Economist – a specialist in the field of economics. ◦ The study of economics includes 2 branches.  Macroeconomics – economics on a national and global scale, concerned with the economic decisions made by governments.  Microeconomics – focuses on economic decisions made by individual people and businesses.

The Need for Economic Systems Economic Resources ◦ Things that are needed to reach your goals.  Money, time, skills, personal energy, tools, community agencies ◦ Societies have resources they need to meet their goals.  Land and natural resources

Scarcity and Opportunity Cost ◦ The resources of a society are limited, but people’s wants are unlimited. ◦ Scarcity – An economic system can’t possibly produce all the goods and services that people want; therefore, choices must be made about how the limited resources will be used. ◦ Opportunity Cost - The value of the best alternative you give up when you decide to use resources one way rather than another.

Three Basic Questions ◦ What goods and services will be produced? ◦ How will these goods and services be produced? ◦ Who should share the goods and services that are produced?

Types of Economic Systems Traditional Economy ◦ Decisions about what to produce, how, and for whom are based on traditional customs and beliefs of the society. ◦ They do things the way their ancestors did. ◦ Many small independent economic units. ◦ Another name is subsistence economy.

Command Economy ◦ Another name is controlled economy ◦ Decisions about what to produce, how and for whom are decided by a central government. ◦ Government decides:  QuantityCostWhere  What WhereYour role

Market Economy ◦ Another name is capitalist system ◦ Decisions about what to produce, how, and for whom are decided by individuals acting in their own self-interest. ◦ An essential characteristic of a market economy is the existence of free market.  Market is a mechanism that brings potential buyers and sellers together to exchange goods and services.

Mixed Economy ◦ A combination of the command and market economic systems.  Free market and government control. ◦ Most of the world’s economies falls into this economy.

The U.S. Economic System The economic goals of the US ◦ Growth-an increase in the amount of G&S produced over time. ◦ Efficiency-wise use of limited resources. ◦ Stability-a steady level of economic wellbeing, without wild ups and downs. ◦ Justice-an economic system that treats all citizens fairly. ◦ Security-support systems for citizens who face economic hardship through no fault of their own.

The characteristics of the US economy ◦ Private Property  Individuals and groups are allowed to own economic resources such as land and businesses.  Consumers own the goods that they purchase. ◦ Freedom of Choice  Consumers freely choose how to spend their $.  Consumers also determine which products succeed and fail.

◦ Freedom of Enterprise  The US economy is often called a system of private enterprise or free enterprise.  Individuals are free to own and control business enterprises. ◦ Limited Government Control  Businesses are allowed to compete for profit with a minimum of government regulation.

PRODUCERS AND CONSUMERS Section 5.2

Producing Goods and Services The Profit Motive ◦ Profit-earnings after all costs of production have been paid. ◦ Only the G&S that make profit will be available to you.

Factors of Production ◦ Five Basic Resources (factors of production)  Land  Water  Any resource on or in them  FishAnimalsTrees  Mineral Deposits

 Labor  The work that people do is a human resource.  Result in the production of G&S.  Capital  Machines and technology used in the production of G&S.  Entrepreneurship  Owning your own business.  US Small Business Administration  Loans and Grants are available.

 Technology  Technological advanced make it possible to develop new types of G&S or new ways of producing and distributing existing ones.

◦ Productivity  A measure of the efficiency with which G&S can be produced.  Increased by technology, entrepreneurship and specialization  Focus on what you do well

◦ Business Organizations  Businesses are often classified by the way they are organized.  Individual Proprietorship  The business is owned and controlled by one person known as the Proprietor  Partnership  The business is owned and controlled by two or more people.  Corporation  An organization that is owned by many people by treated by law as a single entity separate from its owners.  Owners of a corporation = shareholders  They purchase shares which are units of ownership  If it makes profit so does the shareholders.  They cannot lose more money then they invested.

Prices in a Free Market (Supply and Demand) Demand = the quantity of a particular good or service that consumers are willing and able to buy at a given price. ◦ It goes up or down depending on the price at which the product is offered during a given time period. ◦ Law of demand –  When the price of a product goes down, demand for that product will generally go up.  When the price goes up, demand usually goes down

Supply = the quantity of a particular product that produces are able and willing to make available for sale. ◦ Law of supply  When the price of a product goes up, the supply will generally go up.  When the price goes down, the supply goes down.

Interaction of Demand and Supply

Competition – rivalry between two or more businesses that offer similar G&S. ◦ Another factor that affects price.

Consumers in the Marketplace Consumer spending has a major impact. ◦ Profit ◦ What products are produced. ◦ Competition ◦ This is call consumer sovereignty. ◦ Consumers can band together to exert pressure on businesses or political leaders by boycotting.

THE GOVERNMENT’S ROLES Section 5.3

Levels of Government Three Levels of Government ◦ Federal  Operates on the national level  Deals with matters that affect the country. ◦ State  Rights and powers not granted to the federal government ◦ Local  Government bodies such as counties, townships, cities towns and boroughs work to meet the needs of citizens.

#1 - Providing Public Goods and Services Public G&S are those that federal, state, and local gov. provide to citizens ◦ National defense ◦ Police and Fire ◦ Courts and Prisons ◦ Public parks ◦ Street, highway, and bridge construction and maintenance ◦ Public education ◦ Public transportation

# 2 = Redistributing Income Social Security and Medicare ◦ Social Security – an insurance program that is sponsored by the federal government and pays benefits to qualified people.  Paid for by a required tax on the earnings of most workers.

 Retirement Benefits  Certain age and retire  If you paid into it, you are eligible to receive  Survivor’s Benefits  When an insured worker dies, the surviving spouse and children are paid benefits to replace lost income.  Disability Benefits  Workers who develop physical or mental conditions that prevent them from working.  Medicare-a program that pays some of the costs of medical and hospital care for people who are 65 or older.  Can be under 65 if disabled

Unemployment Insurance  Provides income to eligible workers who are unemployed through no fault of their own.  Funding comes mainly from a tax paid by employers.

Public Assistance Programs ◦ Provides aid to individuals based on need, regardless of whether they have paid taxes into the program.  Temporary Assistance to Needy Families (TANF)  Provides low-income families with cash payments and job opportunities.  Supplemental Security Income (SSI)  Cash for food, clothing, and shelter to the elderly, disabled, and their families.  The Social Security Administration administers.  Federal and state funds.

 Food Stamps  Unemployed, on public assistance, or homeless, and low- income  Paper coupons or electronic card are used like cash to buy food.  USDA and state agencies  Supplemental Food Programs for Women, Infants and Children (WIC)  Provides nutritious food and nutrition counseling to women who are pregnant or have just given birth.  Food for infants to 5 years old.  USDA and state health dept.

 National School Lunch and School Breakfast Programs  Provides schools with surplus food and $ for lunches and breakfasts  Federal Government  Food Distribution Program  Distributes food to nursing homes, day care centers, homeless shelters, food banks, and low-income  USDA  Medicare  Provides health-related services to low-income and needy  Federal and State

 State Children’s Health Insurance Program  Children from low-income families who don’t have health insurance and don’t qualify for Medicare.  Housing Programs  Provides several types of programs to help people rent or buy affordable housing.  The Department of Housing and Urban Development (HUD)

#3 - Regulating Economic Activity Protecting the Environment ◦ The Environmental Protection Agency  Sets standard for pollutants and takes action against polluters. Protecting Consumers ◦ Ensures unsafe products are taken off the market. ◦ Limit the sale of potentially misused products.  Alcohol and prescription drugs

Protecting Workers ◦ From being exploited by employers. ◦ Minimum wage ◦ Child labor laws ◦ Discrimination  Race  Ethnic origin  Religion  Gender  Disability

Promoting Competition ◦ Federal and state  Preventing monopolies – sometimes called trust, is a situation in which a single company controls the supply of a G&S for which there is no close substitute.  May exist because no other company choses to compete.  They sometimes try to eliminated competition.  Antitrust laws are designed to regulate unfair business practices that reduce competition.

PRINCIPLES OF TAXATION Section 5.4

Purposes of Taxation A tax is a required payment to a local, state, or national government. ◦ To fund public goods and services.  From road repair to national defense.  Taxes are the main source of revenue – money collected or received by a government for public use.

◦ To influence behavior  Taxes on tobacco and alcohol  Used to discourage people from using these products.  Tax breaks are offered on behaviors that are good.  Home ownership  Charitable giving

◦ To stabilize the economy  The government can raise or lower the taxes to stabilize the cycles of growth and decline. ◦ To redistribute income  The gov increases taxes on some groups and decreasing it for others.  Taken from the wealthy to give to the poor.

The Taxes People Pay Income Tax ◦ You are taxed on the income you earn from a job or other sources.  Federal Income Tax  Collected by Internal Revenue Services (IRS)  Personal Income Tax  This is the federal government’s main source of revenue.

Social Security Tax ◦ This pays for the Social Security programs. ◦ Based on wages earned and are withheld from paychecks.  FICA (Federal Insurance Contributions Act) ◦ Employers and employees pay equal amounts. ◦ Self-employed people pay the entire amounts.

Sales Tax ◦ Some states, consumers pay tax on the value of the G&S they purchase.  This is were most states revenues comes from.  Food and prescription drugs are not taxed as much or at all. Excise Tax ◦ Tax on the manufacture or sale of certain G&S.  Examples:  Motor fuelAlcohol  TobaccoFirearms  Air transportationTelephone

Property Tax ◦ Based on the value of land and buildings owned. ◦ Collected by state and local ◦ Main source of revenue for local gov ◦ Your school is funded largely by this tax. Estate and Gift Tax ◦ Estate tax is based on the value of a person’s property after death. ◦ Gift tax is charged to someone who gives a gift exceeding a certain dollar value.

Business or License Taxes ◦ Business taxes are for who owns a business. ◦ License taxes are for professions that require you to be licensed.  Example:  TeacherDoctorLawyer  Electrician Customs Duties and Tariffs ◦ Federal government tax on goods imported.

Taxes and Fairness Two way government collect the taxes from us. ◦ Benefit Principle  Holds that those who benefit from a public service should pay for it.  Example  Motor vehicles and gasoline is used to repair and maintain roads ◦ Ability-to-pay Principle  More taxes should be paid by people who can afford to pay more.

Tax Rates ◦ This is the % that is charged in tax.  Flat Tax- the rate is the same for everyone who pays the tax.  Graduated Tax- Different rates  Federal income tax is an example  People who make more pay more.  People who make less pay less.

Relationship of Taxes to Income ◦ Proportional Tax  Takes the same % out of everyone’s income.  Flat state income tax ◦ Progressive Tax  Takes a larger % of the income from high-income people than low-income people.  Federal Income Tax ◦ Regressive Tax  Takes a larger % of the income of low-income people than high-income people.

How Taxes Are Spent Federal level ◦ Social programs  Social Security  Public assistance  Health care State and Local level ◦ 1/3 education ◦ Public assistance ◦ Transportation ◦ Public safety ◦ Health care