1. Chapter 6 – Economic Systems Economic Systems and How they Work…

2. Review of Major Concepts Economic Systems* This information will help broaden your understanding of how economics works

3. Why does it matter? Economics is the language of power in our culture Money disputes are the number one cause of discord in our homes! We live in an age of capitalism and market-driven decision making by govt’s

4. Define economic system

5. Way in which a nation uses its resources to satisfy its people’s needs and wants*

6. What three questions must all economic systems answer?

7. What should be produced?* How should it be produced?* For whom should it be produced?*

8. Does a pure economic system really exist?

9. No- they are all mixed economies to some degree Can you explain how this is so?

10. Every economy is influenced by the government … gov’t has some role to play even if it’s a small role. Even hard core communist societies allowed some sense of individualism and private propery

11. What are the major types of economic systems and their differences?

12. Traditional Command Market Mixed*

13. Define traditional economy

14. System in which economic decisions are based on customs and beliefs that have been handed down from generation to generation*

15. Traditional Answers the three basic questions according to tradition Things are done, “the way they have always been done.” Economic decisions are based on customs and beliefs-often religious- handed down from generation to generation*

16. Traditional Examples Inuit of North America San of the Kalahari in Africa Aborigines of Australia

17. Traditional Advantages: Everyone knows their role Little uncertainty of what and how to produce, for whom is usually themselves

18. Traditional Disadvantages: Discourages new ideas/technology Punishes people who break rules Lower standard of living

19. Define command economy

20. System in which the government controls the factors of production and makes all decisions about their use*

21. Command Government decides questions of production Example: Former USSR, Cuba, North Korea, and China

22. Command Advantages: Speed in which resources can be re- routed (agriculture to industry) Very secure - decisions made for you, no uncertainty about what to do Some education, healthcare, public services, available at little or no cost Strong commitment to EQUALITY of citizens

23. Command Disadvantages: Not designed for consumer wants - only basic needs provided Sacrifice personal gain for the good of the state and benefit for future generations No financial incentive for hard work Not much flexibility or creativity

24. Command Disadvantages: Large bureaucracy (bloated, expensive) Individual abilities not considered* people do what ever job the gov’t needs All change is ‘top down’ and enforced by state – often results in brutal oppression

25. Command Disadvantages: Little flexibility-discourages change Individual abilities not considered* All change is ‘top down’ and enforced by state – often results in brutal oppression

26. Define market system

27. 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*

28. Market People and firms act in their own best interests Allow buyers/sellers to come together to exchange goods or services Ex. U.S., Japan, Germany

29. Define market

30. Freely chosen activity between buyers and sellers of goods and services

31. Market Advantages: Over time can adjust to change Individual freedom Little government interference Decentralized decision making

32. Market Advantages: Variety of goods and services High consumer satisfaction Freedom to chose career, spend their income how they wish, own private property, take risks and earn profits

33. Define circular flow of economic activity

34. Economic model that pictures income as flowing continuously between businesses and consumers

35. Market Disadvantages: Doesn’t provide for basic needs of all members Doesn’t provide enough services people highly value*

36. Market Disadvantages: High degree of uncertainty for workers and business

37. Market Disadvantages: Can fail if three conditions are not met 1.Reasonably competitive markets 2.Resources able to move from one activity to another 3.Consumer access to information to make wise choices 4.Government helps to ensure these*

38. Define mixed economy

39. System combining characteristics of more than one type of economy*

40. Mixed Combines the basic elements of a pure market economy and a command economy

41. Section 2 Characteristics of the American Economy*

42. Identify and explain the six major characteristics of a pure market economy?

43. I.The six characteristics of a pure market economy Little or no government control Freedom of enterprise Freedom of choice Private property The profit incentive Competition

44. Explain why a pure market economic system Requires little or no government control.

45. Adam Smith: Scottish economist & ‘Father’ of capitalist/market theory ~ believed Gov’t should not interfere with economic activity unless absolutely necessary (referee)

46. Smith on Minimal Gov’t Role ~ Stated that individuals left alone by gov’t would work for their own self- interest ~ They would then be guided by self- interest to use resources efficiently and thus achieve the maximum good for society

47. Smith on Minimal Gov’t Role…cont’d ~ Individual self-interest will regulate the economy ~ Smith called this regulating force the ‘INVISIBLE HAND’ which caused economy to run efficiently ~ generates tons of wealth for middle classes

48. Identify the term used to explain Smith’s version of the ideal economic system.

49. Capitalism

50. Define capitalism

51. Economic system in which private individuals own the *factors of production* and decide how to use them within legislated limits **Land, Labour & Capital Resources are combined to produce stuff. These are the ‘factors’ or ‘means’ of production**

52. The government lets people and businesses make their own economic decisions w/o excessive gov’t interference

53. Identify the other term used for pure capitalism.

54. Laissez-faire system

55. Define laissez-faire

56. “Leave it Alone” Economic system in which the government minimizes its interference with the economy

57. Free Enterprise system The American economy is also called a free enterprise system

58. Define free enterprise system

59. Economic system in which individuals own the factors of production and decide how to use them within legal limits; same as capitalism

60. Freedom of Choice Buyers, not sellers, make the decisions about what should be produced

61. Private Property One of the most important characteristics of capitalism

62. Define private property

63. Whatever is owned by individuals rather than by government

64. Define profit

65. Money left after all the costs of production-wages, rents, interests, and taxes-have been paid

66. Define profit incentive

67. Desire to make money that motivates people to produce and sell goods and services

68. Profit Incentive When a person invests time, know- how, money, and other capital resources in a business, the goal is to make a profit The desire of profit incentive motivates entrepreneurs to establish new business and produce new kinds of goods and services

69. Define competition

70. Rivalry among producers or sellers of similar goods and services to get more of the “market share” = more customers and more money!

71. Competition Encouraged by the lure of profits Leads to an efficient use of resources Forces businesses to keep their production costs as low as possible For competition to exist, consumers must act out of ‘self-interest’ – desire for best product @ cheapest price

72. Explain how the government sometimes restricts free enterprise in a market economy

73. Gov’t Restrictions if a Market Economy Zoning regulations, child-labor laws, hazardous waste disposal rules, and other regulations All limit free-enterprise to protect you

74. 1.Limited Role of Government Since the 1880’s, the role of government-federal, state, and local- has increased

75. Explain how the government’s role over the economy has increased since the 1880’s

76. Federal agencies regulate the quality of various foods and drugs, watch over the nation’s money, and banking system, inspect workplaces for hazardous conditions, and guard against damage to the environment

77. The federal government also uses tax revenues to provide social programs such as Social Security and Medicare State and local government have expanded their roles in such areas as education, job training, recreation, and care for the elderly.

78. Describe the rights of property.

79. The rights of humans to risk investment, own and produce assets, learn new ways of producing, and enjoy the benefits if these choices result in profits

80. Section 3 The Goals of the Nation

81. Identify the goals of free enterprise.

82. Goals of free enterprise Economic Freedom Economic Efficiency Economic Equity Economic Security Economic Stability Economic Growth

83. Economic Freedom Goal: To allow each member of society to make choices

84. Which country has the highest degree of economic freedom?

85. United States of America

86. Identify the consequences of economic freedom.

87. If a business fails, the government won’t help out

88. Economic Efficiency Wise use of available resources so that costs do not exceed benefits We must always be watchful that the costs of our economic actions do not exceed the benefits

89. Economic Equity The attempt to balance an economic policy so that everyone benefits faily

90. Economic Security Security is provided through a number of government social programs

91. Economic Stability Goal: To reduce the extreme ups and downs in the standard of living The standard of living is measured by the average value of goods and services used by the average citizen during a given period of time

92. Define standard of living

93. The material well-being of an individual, group, or nation measured by how well their necessities and luxuries are satisfied

94. Economic Growth Expansion of the economy to produce more goods, jobs, and wealth

95. What is required to for a nation to achieve economic goals?

96. Trade-offs… Because resources are limited (scarcity) compromises must be made about spending (eg. Hospitals or fighter jets? Welfare or tax cuts?) Compromises between what gov’t VS individuals want/need

97. Explain the responsibilities associated with a well-functioning free enterprise system.

98. Individual responsibilities Ability to support yourself and your family Responsibility to use your education in a reasonable manner that helps you become a productive member of the free enterprise system

99. Individual responsibilities Individuals have the responsibility of electing responsible government officials