2. Copyright Information Presentation Plus! Economics: Principles and Practices Copyright © by The McGraw-Hill Companies, Inc. Developed by FSCreations, Inc., Cincinnati, Ohio 45202 Send all inquiries to: GLENCOE DIVISION Glencoe/McGraw-Hill 8787 Orion Place Columbus, Ohio 43240

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4. 3 Chapter Introduction 1 Economics and You In Chapter 2, you will learn how economic systems differ and what makes up the major characteristics of the United States market system. Click the Speaker button to listen to Economics and You.

5. 4 Chapter Introduction 2 Chapter Objectives Describe the characteristics of the traditional, command, and market economies.  Explain the advantages and disadvantages of the traditional, command, and market economies. Section 1: Economic Systems Click the mouse button or press the Space Bar to display the information.

6. 5 Chapter Introduction 3 Chapter Objectives Describe the basic economic and social groups used to evaluate economic performance.  Evaluate the tradeoffs among economic and social goals. Section 2: Evaluating Economic Performance Click the mouse button or press the Space Bar to display the information.

7. 6 Chapter Introduction 4 Chapter Objectives Section 3: Capitalism and Economic Freedom Click the mouse button or press the Space Bar to display the information. Explore the characteristics of a free enterprise system.  Describe the role of the entrepreneur, the consumer, and government in a free enterprise economy.

8. End of Chapter Introduction Click the mouse button to return to the Contents slide.

9. 8 Section 1-1 Study Guide Main Idea An economic system is a set of rules that governs what goods and services to produce, how to produce them, and for whom they are produced.  Reading Strategy Graphic Organizer As you read the section, complete a graphic organizer like the on on page 33 of your textbook to identify ways in which a market economy differs from, and is similar to, a command economy. Click the mouse button or press the Space Bar to display the information. Section 1 begins on page 33 of your textbook.

10. 9 Key Terms –economic system  –traditional economy  –command economy  –market economy –economy  Section 1-2 Study Guide (cont.) Click the mouse button or press the Space Bar to display the information. Section 1 begins on page 33 of your textbook.

11. 10 Section 1-3 Objectives After studying this section, you will be able to:  Applying Economic Concepts Tradition Tradition plays a stabilizing role in our lives. Even the U.S. economy, characterized by freedom and competition, has some elements of tradition. Study Guide (cont.) –Describe the characteristics of the traditional, command, and market economies.  –Explain the advantages and disadvantages of the traditional, command, and market economies.  Click the Speaker button to listen to the Cover Story. Click the mouse button or press the Space Bar to display the information. Section 1 begins on page 33 of your textbook.

12. 11 Section 1-4 Click the mouse button or press the Space Bar to display the information. Introduction The survival of any society depends on its ability to provide food, clothing, and shelter for its people.  Because these societies face scarcity, decisions concerning WHAT, HOW, and FOR WHOM to produce must be made.  All societies have an economy, or economic system–an organized way of providing for the wants and needs of their people.

13. 12 Section 1-5 Click the mouse button or press the Space Bar to display the information. Introduction (cont.) The way in which these provisions are made determines the type of economic system they have.  Three major kinds of economic systems exist–traditional, command, and market.

14. 13 Section 1-6 Click the mouse button or press the Space Bar to display the information. Traditional Economies Many of our actions spring from habit and custom.  In a society with a traditional economy, the allocation of scarce resources, and nearly all other economic activity, stems from ritual, habit, or custom.  Habit and custom also dictate most social behavior.

15. 14 Section 1-7 Click the mouse button or press the Space Bar to display the information. Examples Many societies–such as the central African Mbuti, the Australian Aborigines, and other indigenous peoples around the world–are examples of traditional economies.  The Inuits of northern Canada in the 1800s provide an especially interesting case of a traditional economy.  –The Inuit hunted, and shared the spoils of the hunt with other families.  –The hunter most responsible for the kill had first choice, the second hunter to help with the kill chose next, and so on.

16. 15 Section 1-8 Click the mouse button or press the Space Bar to display the information. Examples (cont.) –Hunters divided the kill evenly into as many portions as there were heads of families in the hunting party.  –Later, members of the hunting party shared their portions with other families, because the Inuit shared freely and generously with one another.  –The hunter had the honor of the kill and the respect of the village, rather than a physical claim to the entire kill.  –Because of this tradition of sharing, and as long as skilled hunters lived in the community, a village could survive the long harsh winters.

17. 16 Section 1-9 Click the mouse button or press the Space Bar to display the information. Advantages The main strength of a traditional economy is that everyone knows which role to play.  Little uncertainty exists over WHAT to produce.  –If you are born into a family of hunters, you hunt.  –If you are born into a family of farmers, you farm.  Likewise, little uncertainty exists over HOW to produce, because you do everything the same way your parents did.

18. 17 Section 1-10 Click the mouse button or press the Space Bar to display the information. Advantages (cont.) Finally, the FOR WHOM question is determined by the customs and traditions of the society.  Life is generally stable, predictable, and continuous.

19. 18 Section 1-11 Click the mouse button or press the Space Bar to display the information. Disadvantages The main drawback of the traditional economy is that it tends to discourage new ideas and new ways of doing things.  The strict roles in a traditional society have the effect of punishing people who act differently or break rules.  The lack of progress leads to a lower standard of living than in other types of economic societies.

20. 19 Section 1-12 Click the mouse button or press the Space Bar to display the information. Command Economies Other societies have a command economy, one in which a central authority makes most of the WHAT, HOW, and FOR WHOM decisions.  Economic decisions are made by the government: the people have little, if any, influence over how the basic economic questions are answered.

21. 20 Section 1-13 Click the mouse button or press the Space Bar to display the information. Examples There are few command economies in the world today, but they still can be found in North Korea and Cuba.  In the former Soviet Union, until recently a command economy, the government made the major economic decisions.  The State Planning Commission directed nearly every aspect of the Soviet economy.

22. 21 Section 1-14 Click the mouse button or press the Space Bar to display the information. Advantages The main strength of a command system is that it can change direction drastically in a relatively short time.  The former Soviet Union went from a rural (or primitive) agricultural society to a leading industrial nation in just a few decades.  Another advantage is that there is little uncertainty in this type of economy.  Most command economies tend to provide minimum levels of education, health, and other public services at little or no cost to its people.

23. 22 Section 1-15 Click the mouse button or press the Space Bar to display the information. Disadvantages One disadvantage of a command system is that it is not designed to meet the wants of consumers, even though many basic needs are provided.  A second disadvantage is that the system does not give people the incentive to work hard and the results are often unexpected.  –At one time the former Soviet Union set some production quotas by weight.  –This resulted in workers finding ways to add weight to products, thus reducing the number of units they needed to fill the quota.

24. 23 Section 1-16 Click the mouse button or press the Space Bar to display the information. Disadvantages (cont.) A third weakness is that the command economy requires a large decision-making bureaucracy.  Most decisions cannot be made until after consulting a number of people and processing a large amount of paperwork.  Yet a fourth weakness of a command economy is that it does not have the flexibility to deal with minor, day-to-day problems.

25. 24 Section 1-17 Click the mouse button or press the Space Bar to display the information. Disadvantages (cont.) As a result of their inflexibility, command economies tend to lurch from one crisis to the next–or collapse completely as in the case of the former Soviet Union.  Finally, people with new or unique ideas find it difficult to get ahead in a command economy.  Each person is expected to perform a job in a factory, in the bureaucracy, or on a farm, according to the economic decisions made by central planners.

26. 25 Section 1-18 Click the mouse button or press the Space Bar to display the information. Market Economies In a market economy, people and firms act in their own best interests to answer the WHAT, HOW, and FOR WHOM questions.  A market is an arrangement, either a physical place or a tool, that allows buyers and sellers to come together in order to exchange goods and services.  In a market economy, people’s decisions to buy, or not, act as votes.

27. 26 Section 1-19 Click the mouse button or press the Space Bar to display the information. Market Economies (cont.) After the “votes” are counted, producers know what people want.  Because producers are always looking for goods and services that consumers will buy, the consumer plays a key role in determining WHAT to produce.

28. 27 Section 1-20 Click the mouse button or press the Space Bar to display the information. Examples The United States, Canada, Japan, South Korea, Singapore, Germany, France, Great Britain, and other parts of Western Europe are all based on the concept of a market economy.  While there are also many significant differences among these countries, the common thread of the market binds them together.

29. 28 Section 1-21 Click the mouse button or press the Space Bar to display the information. Advantages One advantage of a market economy is that, over time, it can adjust to change.  –During the gasoline shortages of the 1970s the consumers’ demand for large, inefficient cars decreased.  –Because auto makers still wanted to sell cars, they moved resources from the production of large cars to small ones.  –When gas prices finally declined in the mid- 1980s, the trend slowly began to reverse.  Changes in a market economy, then, tend to be gradual.

30. 29 Section 1-22 Click the mouse button or press the Space Bar to display the information. Advantages (cont.) A second major strength of the market economy is its high degree of individual freedom.  Producers may make whatever they think will sell.  They also decide the HOW question by producing their products in the most efficient manner.  Consumers, on the other hand, spend their money on the goods and services they prefer.

31. 30 Section 1-23 Click the mouse button or press the Space Bar to display the information. Advantages (cont.) A third strength is the relatively small degree of government interference.  As long as competition exists, the market economy tends to take care of itself.  A fourth advantage is that decision making is decentralized, or not concentrated in the hands of a few.  Collectively, these decisions direct scarce resources into uses that consumers favor.

32. 31 Section 1-24 Click the mouse button or press the Space Bar to display the information. A fifth strength of the market economy is the incredible variety of goods and services available to consumers.  Almost any product can and will be produced if a buyer for it exists. A sixth strength is the high degree of consumer satisfaction. Advantages (cont.)

33. 32 Section 1-25 Click the mouse button or press the Space Bar to display the information. Disadvantages One of the disadvantages of the market economy is that it does not provide for the basic needs of everyone in the society– some members of the society may be too young, too old, or too sick to care for themselves.  Another disadvantage of a market economy is that it does not provide enough of the services that people value highly.

34. 33 Section 1-26 Click the mouse button or press the Space Bar to display the information. Disadvantages (cont.) Private markets cannot adequately supply a system of justice, national defense, universal education, or comprehensive health care.  A third disadvantage of a market economy is the relatively high degree of uncertainty that workers and businesses face as the result of change.

35. 34 Section 1-27 Click the mouse button or press the Space Bar to display the information. Disadvantages (cont.) Finally, market economies can fail if three conditions are not met.  –First, markets must be reasonably competitive, allowing producers to compete with one another.  –Second, resources must be reasonably free to move from one activity to another.  –Third, consumers need access to adequate information so that they can weigh the alternatives and make wise choices.

36. 35 Section 1-28 Click the mouse button or press the Space Bar to display the information. Disadvantages (cont.) Because of this, we often have to rely on government to ensure that sufficient competition, freedom of resource movement, and adequate information exist. When markets fail, some businesses become too powerful and some individuals receive incomes much larger than that justified by their productivity. 

37. 36 Section 1-29 Figure 2.1 Comparing Economic Systems Comparing Economic Systems

38. 37 Section 1-Assessment 1 Section Assessment Main Idea Using your notes from the graphic organizer activity on page 33 of your textbook, explain how a market economy determines who will receive the benefits from what is produced and sold. Those who act in their own best interests will receive the benefits. Click the mouse button or press the Space Bar to display the answer.

39. 38 Section 1-Assessment 2 Section Assessment (cont.) Describe the characteristics of a traditional economy. A traditional economy sets economic roles; life is stable, predictable, continuous; and discourages ideas. Click the mouse button or press the Space Bar to display the answer.

40. 39 Section 1-Assessment 3 Section Assessment (cont.) Identify the advantages and disadvantages of a command economy. Advantages: great change in short time; Disadvantages: does not meet needs and wants of consumers; lacks incentives to work hard; large bureaucracy; little flexibility; ideas discouraged Click the mouse button or press the Space Bar to display the answer.

41. 40 Section 1-Assessment 4 Section Assessment (cont.) Identify the advantages and disadvantages of a market economy. Advantages: adjust to change gradually; individual freedom; lack of government interference; produces great variety of goods and services; high consumer satisfaction; Disadvantages: does not provide basic needs of everyone; lacks services people want and need; workers and businesses face high uncertainty as a result of change. Click the mouse button or press the Space Bar to display the answer.

42. 41 Section 1-Assessment 5 Section Assessment (cont.) Click the mouse button or press the Space Bar to display the answer. Tradition Give an example of an economic activity from a traditional economy that is seen in today’s market economy. Describe how important this activity is for the economy. Answers will vary.

43. 42 Roles are set by long-standing customs. Section 1-Assessment 6 Section Assessment (cont.) Click the mouse button or press the Space Bar to display the answer. Analyzing information How are roles defined in a traditional economy?

44. 43 Command: central authority answers questions; Market: people and firms acting in their own best interests provide answers. Section 1-Assessment 7 Section Assessment (cont.) Click the mouse button or press the Space Bar to display the answer. Making Comparisons How are the WHAT, HOW, and FOR WHOM questions answered in the command and market economies?

45. 44 Section 1-Assessment 8 Which of the three economic systems would you prefer to live under? Why? Section Close

46. End of Section 1 Click the mouse button to return to the Contents slide.

47. 46 Chapter Summary 1 Section 1: Economic Systems Click the mouse button or press the Space Bar to display the information. Every society has an economy or economic system, a way of allocating goods and services to satisfy the WHAT, HOW, and FOR WHOM questions.  In a traditional economy, the major economic decisions are made according to custom and habit. Life in these economies tends to be stable, predictable, and continuous.  In a command economy, government makes the major economic decisions. Command economies can change direction drastically in a short time, focusing on whatever the government chooses to promote.

48. 47 Chapter Summary 2 Click the mouse button or press the Space Bar to display the information. Section 1: Economic Systems (cont.) Command economies tend to have little economic freedom, few consumer goods, and little uncertainty.  A market economy features decentralized decision making with people and firms operating in their own self-interests.  A market economy adjusts gradually to change, has a high degree of individual freedom and little government interference, is highly decentralized, and offers a wide variety of goods and services that help to satisfy consumers’ wants and needs.

49. 48 Chapter Summary 3 Click the mouse button or press the Space Bar to display the information. Section 2: Evaluating Economic Performance The social and economic goals of U.S. society include economic freedom, economic efficiency, economic equity, economic security, full employment, price stability, and economic growth.  When goals conflict, society evaluates the costs and benefits of each in order to promote one goal over another; many election issues reflect these conflicts and choices.  People’s goals are likely to change in the future, as our economy evolves.

50. 49 Chapter Summary 5 Click the mouse button or press the Space Bar to display the information. Section 3: Capitalism and Economic Freedom Capitalism is a competitive economic system in which private citizens own the factors of production.  The five characteristics of capitalism are economic freedom, voluntary exchange, private property rights, profit motive, and competition.  The entrepreneur is the individual who organizes land, capital, and labor for production in hopes of earning a profit: the profit motive is the driving force in capitalism.

51. 50 Chapter Summary 6 Click the mouse button or press the Space Bar to display the information. Section 3: Capitalism and Economic Freedom (cont.) In capitalism, firms are in business to make a profit. To do this they must offer products consumers want at competitive prices.  Consumer sovereignty states that the consumer is the one who decides WHAT goods and services to produce.  The national government plays the role of protector, provider and consumer, regulator, and promoter of economic goals.

52. 51 Chapter Summary 7 Section 3: Capitalism and Economic Freedom (cont.) The United States has a mixed economy, or a modified private enterprise economy, in which its citizens carry on their economic affairs freely but are subject to some government intervention and regulation.

53. End of Chapter Summary Click the mouse button to return to the Contents slide.

54. 53 ___ the idea that people rule the market ___a society’s organized way of providing for its people’s wants and needs ___the driving force that encourages people and organizations to try to improve their material well- being Click the mouse button or press the Space Bar to display the answer. The Chapter Assessment is on pages 54–55. Chapter Assessment 1 Identifying Key Terms Match the letter of the term best described by each statement. C D H A. capitalism F.inflation B. command economy G. private property rights C. consumer sovereignty H.profit motive D. economic system I.traditional economy E. fixed incomeJ.voluntary exchange

55. 54 Chapter Assessment 2 Click the mouse button or press the Space Bar to display the answer. Identifying Key Terms (cont.) Match the letter of the term best described by each statement. ___a rise in the general level of prices ___a system in which the factors of production are owned by private citizens ___the right and privilege to control one’s own possessions F A G A. capitalism F.inflation B. command economy G. private property rights C. consumer sovereignty H.profit motive D. economic system I.traditional economy E. fixed incomeJ.voluntary exchange

56. 55 Chapter Assessment 3 Click the mouse button or press the Space Bar to display the answer. Identifying Key Terms (cont.) Match the letter of the term best described by each statement. ___an economic system in which ritual, habit, and custom dictate most economic and social behavior ___an economic system in which a central authority makes economic decisions I B A. capitalism F.inflation B. command economy G. private property rights C. consumer sovereignty H.profit motive D. economic system I.traditional economy E. fixed incomeJ.voluntary exchange

57. 56 Chapter Assessment 4 Click the mouse button or press the Space Bar to display the answer. Identifying Key Terms (cont.) Match the letter of the term best described by each statement. ___the situation in which the money an individual receives does not increase even though prices go up ___the act of buyers and sellers freely conducting business in a market E J A. capitalism F.inflation B. command economy G. private property rights C. consumer sovereignty H.profit motive D. economic system I.traditional economy E. fixed incomeJ.voluntary exchange

58. 57 Chapter Assessment 5 Click the mouse button or press the Space Bar to display the answer. Describe the main strength and weakness of a traditional economy. strength: everyone knows which role to play; weakness: discourages new ideas and new ways Reviewing the Facts

59. 58 Chapter Assessment 6 Click the mouse button or press the Space Bar to display the answer. List the five major weaknesses of the command economy. does not meet needs and wants of consumers; lacks effective incentives for people to work hard; requires large bureaucracy that consumes resources; has little flexibility; new ideas and individuality discouraged Reviewing the Facts (cont.)

60. 59 Chapter Assessment 7 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) Describe how a market economy, a traditional economy, and a command economy adapt to change. Traditional: often punishes those who attempt to change the way things are done; Command: problems adjusting to changes because of inflexibility; Market: flexible and can adjust to change

61. 60 Chapter Assessment 8 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) Describe the seven major economic goals which most Americans agree on. economic freedom–freedom to make one’s own economic decisions; economic efficiency–recognition that resources are scarce and need to be used wisely; economic equity–belief that the economy should be managed justly, impartially, and fairly; economic security–protection from effects of adverse economic events; full employment– desire for the economic system to provide as many jobs as possible; price stability–desire for stable prices; economic growth–production of more and better goods and services

62. 61 Chapter Assessment 9 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) Explain how society resolves the conflict among goals which conflict. economic system is flexible, allows choices, and accommodates compromises

63. 62 Chapter Assessment 10 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) State how people and businesses benefit from economic freedom. People can choose their employer, where and when they work, and how they spend their money. Businesses hire the best workers, and decide what and how to produce and what prices to charge.

64. 63 Chapter Assessment 11 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) Explain the importance of the entrepreneur in a free enterprise economy. When entrepreneurs succeed, they benefit by gaining profits; workers benefit through jobs and higher wages; consumers benefit by having more and better products to buy; and government benefits through greater tax revenues.

65. 64 Chapter Assessment 12 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) Provide examples of how the government acts as protector, provider and consumer of goods and services, regulator, and promoter of national goals. protector–enforces laws against false advertising; provider and consumer– provides highways, uses productive resources; regulator–oversees interstate commerce; promoter of goals–minimum wage promotes equity

66. 65 Chapter Assessment 13 Click the mouse button or press the Space Bar to display the answer. Thinking Critically Drawing Conclusions Some people believe the profit motive conflicts with the goals of economic security and equity. Do you agree or disagree? Why or why not? Some might argue that the profit motive does conflict with those goals, pointing out that business owners, in their drive for profits, may be less than fair. Others may argue that there is no conflict, because the drive for profits eventually leads to economic success for all.

67. 66 Chapter Assessment 14 Click the mouse button or press the Space Bar to display the answer. Thinking Critically (cont.) Understanding Cause and Effect How can the movement of people and the communication of ideas affect the type of economic system a society has? Freedom of movement of people and ideas is the hallmark of a market economy. Lack of movement is a tendency of traditional and command economies.

68. 67 Chapter Assessment 15 Click the mouse button or press the Space Bar to display the answer. Thinking Critically (cont.) Making Inferences What incentive does owning private property give people? Private property gives people the incentive to work harder, to save, to invest, and to succeed.

69. 68 Chapter Assessment 16 Click the mouse button or press the Space Bar to display the answer. Thinking Critically (cont.) Making Comparisons Reproduce the diagram on page 55 of your textbook. Then, in the spaces indicated, identify several elements of command and tradition in the U.S. economy that make it a mixed, or modified private enterprise, economy. Answers will vary.

70. 69 Chapter Assessment 17 Click the mouse button or press the Space Bar to display the answer. Applying Economic Skills Tradition Most people tip for service in restaurants, but not for service at clothing stores or gas stations. Explain how this illustrates economic behavior by tradition rather than by market or command. Tipping for service in a restaurant is a long-established tradition, just as tipping at clothing stores and gas stations is rarely done.

71. 70 Chapter Assessment 18 Click the mouse button or press the Space Bar to display the answer. Applying Economic Skills (cont.) Freedom and Equity Explain the role you as a consumer must play in obtaining economic equity for yourself. reporting unfair pricing or false advertising

72. 71 Chapter Assessment 19 Click the mouse button or press the Space Bar to display the answer. Applying Economic Skills (cont.) Voluntary Exchange How does the principle of voluntary exchange operate in a market economy? Both buyers and sellers must believe that something they want has more value than the money or products they want to give up.

73. 72 Chapter Assessment 20 Identify the type of economy in the following situations: (1) After hearing complaints about postal service, Jack starts a delivery service. (2) Production has remained the same for generations. (3) A proposal to introduce new production methods is held up for months while paperwork is prepared. market; traditional; command Click the mouse button or press the Space Bar to display the answer.