1. © 2009 Delmar, Cengage Learning Chapter 2 Agricultural Economics and the American Economy

2. © 2009 Delmar, Cengage Learning Essential Questions 1.What is economics? 2.Evaluate the major economic systems. 3.How does economics function as both a large-scale and small-scale system?

3. © 2009 Delmar, Cengage Learning What is Economics? Economics is a social science that studies how consumers, producers, and societies choose among the alternative uses of scarce resources in the process of producing, exchanging, and consuming goods and services.

4. © 2009 Delmar, Cengage Learning Three Components of Economics Scarcity: –An economic term for a situation in which there are not enough resources available to satisfy people’s needs and wants. Resources: –Inputs that society uses to produce outputs – natural, human, manufactured, and entrepreneurial. Wants & Needs: –Wants are things above and beyond what is required for daily living. –Needs are essential to daily living (water, food, shelter).

5. © 2009 Delmar, Cengage Learning Types of Resources Natural Resources (Land) Human Resources (Labor) Manufactured Resources (Capital) Entrepreneurship (Management) –Goods and Services

6. © 2009 Delmar, Cengage Learning Three Economic Questions These are questions asked by all societies: –What goods should be produced, and how much of each? –How should these goods be produced? –Who should get what and how much? The answers to these questions will determine the type of economic system each society will use.

7. © 2009 Delmar, Cengage Learning Combining the Economic Ingredients To simplify the economic questions, assume all the goods and services in our society are represented by a pie. 1.What type of pie to produce? 2.What combination of ingredients to use? 3.How to divide the pie?

8. © 2009 Delmar, Cengage Learning Six “Major” Economic Systems Economists have identified six major economic systems: –Traditional –Capitalism –Fascism –Socialism –Communism (Command) –Mixed The major distinction between each classification is the degree of control by private individuals versus the group (or government).

9. © 2009 Delmar, Cengage Learning The Traditional System The traditional system answers the three basic economic questions according to tradition, or what has always been done. Economic decisions are based on customs, religious beliefs, and ancestry. These systems exist in limited parts of Asia, Africa, the Middle East, and Latin America.

10. © 2009 Delmar, Cengage Learning Capitalism In this economic society, individuals have free reign over their time and resources and can determine exactly how to use these assets, with few legal controls by the government. Ownership is private and the factors of production are controlled by the individual. Competition in the driving force in every economic activity and decision – the market forces determine prices and value.

11. © 2009 Delmar, Cengage Learning Socialism The founding idea of socialism (as an economic system) is public ownership of all productive resources. The government directs all decisions as to the utilization of resources. It is intended for the mutual benefit of all people and individual economic incentives are limited. Lack of free prices and free markets eliminates competition.

12. © 2009 Delmar, Cengage Learning Fascism In this system, productive property is owned by individuals. Use of this property reflects the preference of the government. Individuals have a high degree of economic power, IF they support the government in power. This system suppresses opposition, censors criticism, and denies freedom.

13. © 2009 Delmar, Cengage Learning Communism Totalitarian style of government in which a single authoritarian political park controls government-owned means of production. Private individuals have no control. Everyone contributes according to ability. Distribution is made according to need.

14. © 2009 Delmar, Cengage Learning Mixed Economic Systems Most societies reflect multiple aspects of different economic structures, thus being a “mixed” economy. Economic policy may change in a society due to war, times of hardship, or changes in leadership. America, though often said to be capitalistic, is actually a mixed economy.

15. © 2009 Delmar, Cengage Learning The American Economy Individuals have a great deal of economic control. However, the government guides production in many industries and regulates nearly all sectors. Government subsidies and grants act as incentives to increase or reduce production of goods and services.

16. © 2009 Delmar, Cengage Learning Father of Economy England was the major center of intellectual activity during the 18 th century. Adam Smith – known as the Father or Founder of Economics. “The Wealth of Nations” responded to the economic environment in this period. A small percentage of people were wealthy, while the masses were extremely poor.

17. © 2009 Delmar, Cengage Learning The American System of Free Enterprise The American Economy has six major characteristics: –Little or no government control –Freedom of enterprise –Freedom of choice –The right to own private property –Profit incentive –Competition

18. © 2009 Delmar, Cengage Learning The Role of Government The Founders of the US originally limited the role of the government to national defense and keeping the peace. Recently, government’s role has increased to regulation of business and provision of public services.

19. © 2009 Delmar, Cengage Learning Free Enterprise Free enterprise – economic system that allows individuals to organize and conduct business with a minimum of government control; individuals privately own what they produce. Common term for US economic system. Limits – Minimum age to work (ex. 16 years old) in most states and then limit of how many hours, Minimum wage, etc.

20. © 2009 Delmar, Cengage Learning Freedom of Choice Part of freedom of choice is freedom to fail. Buyers make the decisions about what to produce. Success or failure of a good or service depends on the individuals freely choosing what they want. Government sets law to protect buyers – safety standards such as labels and tags.

21. © 2009 Delmar, Cengage Learning Private Property Private property – what is owned by an individual or group rather than by the federal, state, or local government. Individuals have the freedom to buy whatever they can afford.

22. © 2009 Delmar, Cengage Learning Profit Incentive Profit incentive – the desire to make a profit. The goal of a profit is what prompts people to produce things that others want to buy.

23. © 2009 Delmar, Cengage Learning Competition Producers or sellers of goods hope to win more business by offering lower prices or better quality. Success depends upon the ability to produce products at a price the average consumer can afford.

24. © 2009 Delmar, Cengage Learning Macroeconomics vs. Microeconomics Economics is most often looked at in two ways: Macro (large scale) and Micro (small scale) Macroeconomics studies factors on a national scale and is most concerned with the following: –Gross domestic product, aggregate supply, aggregate demand, unemployment, inflation and deflation, monetary policy, and fiscal policy Microeconomics considers individual markets and is most concerned with the following: –Markets and prices, supply and demand, competition and market structure, income distribution, business failures, and the role of government