1. Chapter 2 – Economics

2.  Four different types of economic systems have evolved throughout history as cultures, societies, and nations have struggled with what to do with the factors of production…  1) Land  2) Labor  3) Capital

3.  Cultures, societies, and nations have placed emphasis on different goals and priorities in their efforts to answer three basic questions: ▪ 1) What goods and services should be produced? ▪ 2) How should they be produced? ▪ 3) Who should get what is produced?

4.  Traditional System  Command System  Market System  Mixed System

5.  3 questions answered according to tradition  “things are done the way they always have been done”  Decisions based on customs and beliefs  Handed down through generations  Advantages  You know what is expected of you  Ties to others extremely strong  Disadvantages  Change is discouraged  Production inefficient

6.  3 questions answered by government leaders  Individual  small group  Central planners  Gov’t controls the factors of production  Advantage  Speed which decisions are made  War-time changes  Disadvantage  Lack of incentives to work hard  Lack of consumer goods  No reason to work smartly or efficiently

7.  AKA – Capitalism  3 questions are answered by individuals deciding for themselves  “markets” – voluntary exchange (far and wide!)  The circular flow of economic activity explains how the market system works…  Explains the exchange of good and services between producers and consumers…

9.  Advantages  People have freedoms  Competition provides consumers with choices of goods  Efficient cost system  Disadvantages  Concern over those who cannot work ▪ Too young, too old, too sick

10.  Combines SOME government involvement and regulation with aspects of the free market…  Individuals have the ability to make choices, but governments regulate and control certain aspects of that economy…

11.  The American economy is considered a mixed market.  aspects of governmental control in a free market system.  6 key principles that drive the American economy and let it thrive…  1) Limited role of Gov’t  2) Freedom of Enterprise  3) Freedom of Choice  4) Profit incentive  5) Private Property  6) Competition

12.  Adam Smith and “Wealth of Nations” (1776) - capitalism and “laissez- faire”  Ind. left on their own would make decisions to benefit their own self- interest…  The U.S. system of Capitalism = freedom + limits by the gov’t  Because they are making decisions based on their own self-interest… they would use resources efficiently!

13.  Stimulates entrepreneurship!  Failure or success is possible  Individuals have the freedom to do what they please with factors of production!  Cars? Start an auto-shop!  Food? Open a restaurant!  Zoning regulations limit the U.S. free enterprise…  Should we have zoning? Does it cut back on free enterprise?

14.  The opposite of free enterprise…  Concerns buyers, NOT sellers!  Buyers make decisions on what should be produced…  This is done through the purchases they make  Producers recognize these purchases and adjust accordingly

15.  In the U.S., because of the economic system present, ind. are motivated to make a profit!  Profit motivates entrepreneurs to establish new technology and better products to keep customers…  $ left after costs of production are paid

16.  Probably the most important aspect of the U.S. economic system…  You are free to buy whatever you want – to make it your own…  You can decide what you want to do with your private property…

17.  Lure of profits encourages competition…  Rivalry among producers creates/forces efficiency in the markets…  Lower prices  Better quality  Leads to efficient use of resources  Prices low to attract buyers  High enough to make profit

18.  Freedom  Allow each member of society to make choices  Efficiency  Use limited resources wisely  Security  Government programs protect us from certain risks

19.  Stability  Reduce extreme ups and downs in standard of living ▪ Material well-being of individual, group, or nation  Growth  Producing increasing # of goods and services over long term  Equity  Economic system should be fair and just