1. Chapter 2 Economic Systems & the American Economy

2. Economic Systems
Economic system – way in which a nation uses its resources to satisfy its people’s needs and wants

3. 3 Basic ?s of Economic Systems
What should be produced?
If one item is produced, then less of something else must be produced.
How should it be produced?
What labor, capital goods, and factors of production will be used?
For whom should it be produced?
How will goods be distributed?
Price system, majority rule, 1st come-1st served, sharing equally or military force

4. Types of Economic Systems
Traditional System
Command (controlled) System
Market (capitalist)
Mixed System

5. Traditional System
Traditional economy – system in which economic decisions are based on customs and beliefs that have been handed down from generation to generation
Trades and work learned from parents
Know what is expected of you
Change discouraged or punished
Production inefficient and choice of goods is rare
Examples – Eskimos, Aborigines & Amish?

6. Command System
Command economy – system in which the government controls the factors of production and makes all decisions about their use
Government decides what to produce & how it will be distributed
Government guides people into certain jobs
Lack of incentive to work hard, few choices, limited efficiency or inventiveness
North Korea & China (changing)

7. Market System
Market economy – 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
Limited government, individuals control factors of production and economy driven by market price

8. Market System
Market – freely chosen activity between buyers and sellers of goods and services
Circular flow of economic activity – economic model that pictures income as flowing continuously between businesses and consumers
Advantages – free to choose career and how to spend $, own private property, take risks, & many goods for purchase
Disadvantages – How to provide for elderly, young & sick

9. Mixed System
Mixed economy – system combining characteristics of more than one type of economy
Most countries have a mixed economy
Most individuals make decisions but are regulated to various extents by the government

10. Characteristics of the American Economy
Freedom of choice – can choose to produce or not produce or to buy or not to buy
6 Characteristics of a pure market system
1. Little or no government control
2. Freedom of enterprise
3. Freedom of choice
4. Private property
5. Profit incentive
6. Competition

11. Characteristics of the American Economy
Limited role of government
Adam Smith – founder of modern economics - Wealth of Nations – people will use resources efficiently to achieve the maximum good for society
Capitalism – economic system in which private individuals own the factors of production & decide how to use them within legislated limits
Laissez-faire – pure capitalism – economic system in which the government minimizes its interference with the economy
Government has increased its role since the 1880s

12. Characteristics of the American Economy
Freedom of enterprise
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
Regulations – zoning, child labor, pollution & taxes – examples
May make money or may lose money
Freedom of choice
Buyers, not sellers, make decisions about what is to be produced
Government influences the market to protect consumers – safety standards & price controls

13. Characteristics of the American Economy
Profit Incentive
Profit – money left after all the costs of production have been paid – wages, bills & taxes
Profit incentive – desire to make money that motivates people to produce and sell goods and services

14. Characteristics of the American Economy
Private Property
Private property – whatever is owned by individuals rather than by government
Constitution guarantees an owner’s right to private property and its use (eminent domain)
Competition
Competition – rivalry among producers and sellers of similar goods and services to win more business
Leads to lower prices, better quality and an efficient use of resources
Low barriers to entry are needed

15. The Goals of the Nation Goals of free enterprise in the U.S.
Economic freedom – allows members of society to make choices and possibly fail
Economic efficiency – wise use of available resources so that costs do not exceed benefits
Economic equity – attempt to balance an economic policy so that everyone benefits fairly – (equal pay, hiring practices & disabled)

16. The Goals of the Nation
Economic security – protection against accidents, natural disasters, bank failures etc.
Economic stability – reduce extreme ups & downs in standard of living
Standard of living – the material well-being of an individual, group, or nation measured by how well their necessities and luxuries are satisfied
Economic growth – expansion of the economy to produce more goods, jobs and wealth
Trade-Offs among goals – limits on what you can do with resources due to scarcity (Social Security)

17. The Goals of the Nation Rights & Responsibilities
Right to enter any profession or business you want
Right to work very little or a lot
Right to buy what you want
Need to support yourself and your family
Need to be a productive member of society
Need to have responsible government