2. The U.S. Economy in Historical Perspective The U.S. economic system is a market economy based on private property and the markets in which individuals decide how, what, and for whom to produce Markets work through a system of rewards and payments Individuals are free to do whatever they want as long as it is legal Fluctuations in prices play a central role in coordinating individuals’ wants in a market economy Most economists believe the market is a good way to coordinate economic activity

3. Capitalism and Socialism Capitalism is an economic system based on the market in which the ownership of the means of production resides with a small group of individuals (called capitalists) Socialism is an economic system based on individuals’ goodwill towards others, not on their own self-interest, and in which, in principle, society decides what, how, and for whom to produce 3-2

4. Evolving Economic Systems Feudalism is an economic system based on tradition and dominated the Western world from the 8 th to the 15 th century Mercantilism is an economic system in which the government controls economic activity by doling out the rights to undertake economic activities and was dominant until the 18 th century During the Industrial Revolution, technology and machines rapidly modernized industrial production Capitalism

5. 1. Adam Smith’s The Wealth of Nations (new theory) The best way to increase the wealth of a country is through individual decision making with minimal government influence. Laissez faire (new) The Invisible Hand – people serve their own interests. They produce what is in demand and will profitable.

6. Problems developed 1. Large businesses became monopolies and trusts 2.Living conditions became harsh - long hours, low wages, slums, child labor 3. Government Response a.Anti-trust legislation - FTC, Food and Drug Act, Sherman Anti-Trust Act b. Movement away from laissez faire

7. The Great Depression a. Problems of the 20’s. b. Creates a need for inputs and a need for markets - production for WWI not needed any longer - tariffs eliminated markets - farmers were overproducing - unemployment rising - inside of the Production Possibilities Curve

10. b. The government took action Government required to take action: - full employment - full production - stable prices - farmers paid not to grow - government work projects set up - Social Security created - FDIC - Employment Act of 1946

11. HouseholdsBusinesses Product Markets Factor Markets 1.Receiving a paycheck at the end of each month? 2. Delivering a specially ordered car to a buyer? 3. Receiving patient car in a hospital? 4. Using a credit card to buy a meal in a restaurant? 5. Earning profit at your summer ice cream stand? 6. Obtaining college credits?

12. Households The largest source of household income is wages and salaries Households supply the factors of production with which businesses produce and government governs In the economy, households vote with their dollars to determine what businesses produce Households are groups of individuals living together making joint decisions

13. Dividends Interest Proprietor’s Income Rental Income Transfer Payments Wages and Salaries 1.7 4.9 8.4 11.1 13.4 64.7 Source of income % Social Security -4.3

14. All Households Headed by married couple Headed by female – husband gone Household head 25-34 years old Household head HS grad Household head BA degree 44,473 42,148 28,116 59,346 35,744 64,406 Characteristic Average Income Household head 65+ 23,043

15. Savings Spending Taxes 84 15.2 1.9

16. Services Durable Goods Non-durable Goods 59 29 12

17. Business Businesses produce what they believe will sell and make a profit Businesses in the U.S. decide what to produce, how much to produce, and for whom to produce it By channeling the desire to make a profit for the general good of society, the U.S. economic system allows the invisible hand to work Although businesses decide what to produce, they are guided by consumer sovereignty Businesses are private producing units in our society

18. proprietorship partnership corporation 72.2 7.7 20.1 4.8 7.9 87.3 Type NumberRevenue

19. Business: Forms of Business AdvantagesDisadvantages Proprietorship Minimum bureaucratic hassle Direct control by owner Limited ability to get funds Unlimited personal liability Partnership Ability to share work and risk Relatively easy to form Limited ability to get funds Unlimited personal liability (even for a partner's blunder) Corporation No personal liability Increasing ability to get funds Ability to avoid personal income taxes Legal hassle to organize Possible double taxation of income Monitoring problems

20. Government 1.An actor who collects money in taxes and spends that money on projects, such as defense and education The government plays two general roles in the economy: 3-19

21. Government: Income of the Federal Government

22. Government: Expenditures of the Federal Government 3-21

23. Government 2. A referee who sets the rules that determine relations between businesses and households a. Provide a stable set of institutions and rules. b. Promote effective and workable competition. c. Correct for externalities. e. Provide public goods. f. Adjust for undesirable market results. -Enforce contracts and protect property rights -restrict and regulate monopolies -pollution -Enforce contracts and protect property rights -Employment Act of 1946 -drug busts d. Ensure economic stability and growth.

24. HouseholdsBusinesses Product Markets Factor Markets Resources Payments $$ Goods and Services Business Taxes Goods and Services Income Taxes Payments and Legal Resources Payments Goods and Services

25. Market Failures and Government Failures Government failures are situations in which the government intervenes and makes things worse Market failures are situations in which the market does not lead to a desired result Policy makers must decide which failure is the least problematic, a market or government failure

26. Global Institutions and Corporations U.S. economic institutions are integrated with the world’s economy The U.S. economy makes up 20% of the world output and consumption, but only 6% of the world’s land mass and less than 5% of the world’s population Global corporations are corporations with substantial operations in both production and sales in more than one country Global corporations create jobs, bring new technologies, and provide competition for domestic companies

27. Coordinating Global Issues No global government to regulate global corporations - international institutions developed to promote negotiations and coordinate economic relations among countries Some examples of international institutions: The United Nations is an organization designed to achieve international cooperation but it has no ability to tax or enforce its policies on its members The World Bank is a multinational, international financial institution that works to secure loans for developing countries

28. 1.Highly-developed economies must make the basic economic choices, whereas less-developed economies produce so little that no choices are possible. 2.Price is the language through which buyers and sellers communicate their intentions to one another in a pure market economy. 3.Households buy goods and services in output markets and sell factors of production in input markets. 4.The least-cost method of production is the method that uses resources most efficiently. True or False?

29. 6.In a socialist economy, goods and services go only to those who can pay for them with money earned from resources they own. 7.A socialist system favors collective ownership of society's factors of production. 5.The value judgments of persons running households and businesses play virtually no role in economic decision making in a pure market economy.

30. 8. The invisible hand doctrine was Adam Smith's idea that allowing competing sellers to act in their own best interests advances the economic interests of all society. 9. The Employment Act of 1946 gave the federal government the right and responsibility to provide an environment for the achievement of full employment, full production, and price stability. 10. Over the years, government's intervention in the economy has increased, but the increase has not been smooth or continuous.