economics chapter 2
TRANSCRIPT
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Chapter 2
Economic Systems and the American Economy*
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Section 2
Economic Systems*
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Define economic system
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Way in which a nation uses its resources to satisfy its people’s needs and wants*
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What three questions must all economic systems answer?
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• What should be produced?*• How should it be produced?*
• For whom should it be produced?*
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Does a pure economic system really exist?
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No- they are all mixed economies to some degree
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What are the major types of economic systems and their differences?
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• Traditional• Command
• Market• Mixed*
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Define traditional economy
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System in which economic decisions are based on customs and beliefs that have been handed down from generation to
generation*
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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*
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Traditional
Examples• Inuit of North America
• San of the Kalahari in Africa• Aborigines of Australia
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Traditional
Advantages:• Everyone knows their role
• Little uncertainty of what and how to produce, for whom is usually
themselves
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Traditional
Disadvantages:• Discourages new ideas/technology
• Punishes people who break rules• Lower standard of living
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Define command economy
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System in which the government controls the factors of production and makes all decisions about their use*
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Command• Government decides questions of
production• Example: Former USSR , Cuba, North
Korea, and China
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CommandAdvantages:
• Speed in which resources can be rerouted (agriculture to industry)
• Little uncertainty-decisions made for you
• Some education, healthcare, public services, available at little or no cost
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Command
Disadvantages:• Not designed for customer wants-basic
needs provided• Sacrifice for the good of the state and
benefit for future generations
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Command
Disadvantages:• No incentive to work hard-just enough
to fill quota• Large bureaucracy
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Command
Disadvantages:• Little flexibility-discourages change• Individual abilities not considered*
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Define market system
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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*
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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
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Define market
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Freely chosen activity between buyers and sellers of goods and services
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Market
Advantages:• Over time can adjust to change
• Individual freedom• Little government interference• Decentralized decision making
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MarketAdvantages:
• 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
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Define circular flow of economic activity
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Economic model that pictures income as flowing continuously between
businesses and consumers
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Market
Disadvantages:• Doesn’t provide for basic needs of all
members• Doesn’t provide enough services
people highly value*
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Market
Disadvantages:• High degree of uncertainty for workers
and business
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MarketDisadvantages:
• 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*
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Define mixed economy
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System combining characteristics of more than one type of economy*
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Mixed• Combines the basic elements of a pure
market economy and a command economy
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Section 2
Characteristics of the American Economy*
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Identify and explain the six major characteristics of a pure market
economy?
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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
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Explain why a pure market economic system
Requires little or no government control.
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Limited Role of Government
Adam Smith:• Described a system in which
government had little to do with a nations economic activity
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1. Limited Role of Government• Stated that individuals left on their
own would work for their own self-interest
• They would then be guided by an “invisible hand” to use resources efficiently and thus achieve the
maximum good for society
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Identify the term used to explain Smith’s version of the ideal economic system.
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Capitalism
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Define capitalism
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Economic system in which private individuals own the factors of
production and decide how to use them within legislated limits
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The government lets people and businesses make their own economic decisions w/o government constraints
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Identify the other term used for pure capitalism.
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Laissez-faire system
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Define laissez-faire
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Economic system in which the government minimizes its interference
with the economy
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1. Limited Role of Government• Since the 1880’s, the role of
government-federal, state, and local-has increased
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Explain how the government’s role over the economy has increased since the
1880’s
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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
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• 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.
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Freedom of Enterprise• The American economy is also called a
free enterprise system
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Define free enterprise system
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Economic system in which individuals own the factors of production and
decide how to use them within legal limits; same as capitalism
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Explain how the government restricts free enterprise.
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Freedom of Enterprise• Zoning regulations, child-labor laws ,
hazardous waste disposal rules, and other regulations
• All limit free-enterprise to protect you
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Freedom of Choice• Buyers, not sellers, make the decisions
about what should be produced
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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
servicesw
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Private Property• One of the most important characteristics of capitalism
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Define private property
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Whatever is owned by individuals rather than by government
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Define profit
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Money left after all the costs of production-wages, rents, interests, and
taxes-have been paid
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Define profit incentive
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Desire to make a money that motivates people to produce and sell goods and
services
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Describe the rights of property.
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• 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
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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, barriers to enter and exit from industries must be
weak
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Define competition
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Rivalry among producers or sellers of similar goods and services to win more
business
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Section 3
The Goals of the Nation
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Identify the goals of free enterprise.
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Goals of free enterprise• Economic Freedom
• Economic Efficiency• Economic Equity
• Economic Security• Economic Stability• Economic Growth
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Economic Freedom• Goal: To allow each member of
society to make choices
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Which country has the highest degree of economic freedom?
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United States of America
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Identify the consequences of economic freedom.
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If a business fails, the government won’t help out
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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
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Economic Equity• The attempt to balance an economic policy so that everyone benefits faily
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Economic Security• Security is provided through a number
of government social programs
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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
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Define standard of living
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The material well-being of an individual, group, or nation measured by how well
their necessities and luxuries are satisfied
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Economic Growth• Expansion of the economy to produce
more goods, jobs, and wealth
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What is required to for a nation to achieve economic goals?
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Trade-offs
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Explain the responsibilities associated with a well-functioning free enterprise
system.
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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
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Individual responsibilities• Individuals have the responsibility of
electing responsible government officials