Chapter 2Chapter 2

Economic Systems & theEconomic Systems & theAmerican EconomyAmerican Economy

Economic SystemsEconomic Systems

Economic system – way in which a Economic system – way in which a nation uses its resources to satisfy its nation uses its resources to satisfy its people’s needs and wantspeople’s needs and wants

3 Basic ?s of Economic 3 Basic ?s of Economic SystemsSystems

What should be produced?What should be produced?If one item is produced, then less of If one item is produced, then less of

something else must be produced.something else must be produced.How should it be produced?How should it be produced?

What labor, capital goods, and factors of What labor, capital goods, and factors of production will be used?production will be used?

For whom should it be produced?For whom should it be produced?How will goods be distributed? How will goods be distributed?

Price system, majority rule, 1Price system, majority rule, 1stst come-1 come-1stst served, sharing equally or military forceserved, sharing equally or military force

Types of Economic SystemsTypes of Economic Systems

Traditional SystemTraditional SystemCommand (controlled) SystemCommand (controlled) SystemMarket (capitalist)Market (capitalist)Mixed SystemMixed System

Traditional SystemTraditional System

Traditional economy – system in which Traditional economy – system in which economic decisions are based on customs economic decisions are based on customs and beliefs that have been handed down and beliefs that have been handed down from generation to generationfrom generation to generation Trades and work learned from parentsTrades and work learned from parents Know what is expected of youKnow what is expected of you Change discouraged or punishedChange discouraged or punished Production inefficient and choice of goods is Production inefficient and choice of goods is

rarerare Examples – Eskimos, Aborigines & Amish? Examples – Eskimos, Aborigines & Amish?

Command SystemCommand System

Command economy – system in which Command economy – system in which the government controls the factors of the government controls the factors of production and makes all decisions production and makes all decisions about their useabout their useGovernment decides what to produce & Government decides what to produce &

how it will be distributedhow it will be distributedGovernment guides people into certain Government guides people into certain

jobsjobsLack of incentive to work hard, few Lack of incentive to work hard, few

choices, limited efficiency or inventivenesschoices, limited efficiency or inventivenessNorth Korea & China (changing)North Korea & China (changing)

Market SystemMarket System

Market economy – system in which Market economy – system in which individuals own the factors of individuals own the factors of production and make economic production and make economic decisions through free interaction decisions through free interaction while looking out for their own and while looking out for their own and their families’ best intereststheir families’ best interests

Limited government, individuals Limited government, individuals control factors of production and control factors of production and economy driven by market priceeconomy driven by market price

Market SystemMarket System

Market – freely chosen activity between Market – freely chosen activity between buyers and sellers of goods and services buyers and sellers of goods and services

Circular flow of economic activity – Circular flow of economic activity – economic model that pictures income as economic model that pictures income as flowing continuously between businesses flowing continuously between businesses and consumersand consumers

Advantages – free to choose career and Advantages – free to choose career and how to spend $, own private property, how to spend $, own private property, take risks, & many goods for purchasetake risks, & many goods for purchase

Disadvantages – How to provide for Disadvantages – How to provide for elderly, young & sickelderly, young & sick

Mixed SystemMixed System

Mixed economy – system combining Mixed economy – system combining characteristics of more than one type characteristics of more than one type of economyof economy

Most countries have a mixed Most countries have a mixed economyeconomy

Most individuals make decisions but Most individuals make decisions but are regulated to various extents by are regulated to various extents by the governmentthe government

Characteristics of the Characteristics of the American EconomyAmerican Economy

Freedom of choice – can choose to Freedom of choice – can choose to produce or not produce or to buy or not to produce or not produce or to buy or not to buybuy

6 Characteristics of a pure market system6 Characteristics of a pure market system 1.1. Little or no government controlLittle or no government control 2.2. Freedom of enterpriseFreedom of enterprise 3.3. Freedom of choiceFreedom of choice 4.4. Private propertyPrivate property 5.5. Profit incentiveProfit incentive 6.6. CompetitionCompetition

Characteristics of the American EconomyCharacteristics of the American Economy

Limited role of governmentLimited role of government Adam Smith – founder of modern economics - Adam Smith – founder of modern economics -

Wealth of Nations – Wealth of Nations – people will use resources people will use resources efficiently to achieve the maximum good for societyefficiently to achieve the maximum good for society

Capitalism – economic system in which private Capitalism – economic system in which private individuals own the factors of production & decide individuals own the factors of production & decide how to use them within legislated limitshow to use them within legislated limits

Laissez-faire – pure capitalism – economic system in Laissez-faire – pure capitalism – economic system in which the government minimizes its interference which the government minimizes its interference with the economywith the economy

Government has increased its Government has increased its role since the 1880srole since the 1880s

Characteristics of the American Characteristics of the American EconomyEconomy

Freedom of enterpriseFreedom of enterprise Free enterprise system – economic system in Free enterprise system – economic system in

which individuals own the factors of production which individuals own the factors of production and decide how to use them within legal limits; and decide how to use them within legal limits; same as capitalismsame as capitalism

Regulations – zoning, child labor, pollution & Regulations – zoning, child labor, pollution & taxes – examplestaxes – examples

May make money or may lose moneyMay make money or may lose money Freedom of choice Freedom of choice

Buyers, not sellers, make decisions about what Buyers, not sellers, make decisions about what is to be producedis to be produced

Government influences the market to protect Government influences the market to protect consumers – safety standards & price controlsconsumers – safety standards & price controls

Characteristics of the American Characteristics of the American EconomyEconomy

Profit IncentiveProfit IncentiveProfit – money left after all the costs of Profit – money left after all the costs of

production have been paid – wages, bills production have been paid – wages, bills & taxes& taxes

Profit incentive – desire to make money Profit incentive – desire to make money that motivates people to produce and that motivates people to produce and sell goods and servicessell goods and services

Characteristics of the American Characteristics of the American EconomyEconomy

Private PropertyPrivate Property Private property – whatever is owned by Private property – whatever is owned by

individuals rather than by governmentindividuals rather than by government Constitution guarantees an owner’s right to Constitution guarantees an owner’s right to

private property and its use (eminent domain)private property and its use (eminent domain) CompetitionCompetition

Competition – rivalry among producers and Competition – rivalry among producers and sellers of similar goods and services to win sellers of similar goods and services to win more businessmore business

Leads to lower prices, better quality and an Leads to lower prices, better quality and an efficient use of resourcesefficient use of resources

Low barriers to entry are neededLow barriers to entry are needed

The Goals of the NationThe Goals of the Nation

Goals of free enterprise in the U.S. Goals of free enterprise in the U.S. Economic freedom – allows members of Economic freedom – allows members of

society to make choices and possibly failsociety to make choices and possibly failEconomic efficiency – wise use of Economic efficiency – wise use of

available resources so that costs do not available resources so that costs do not exceed benefitsexceed benefits

Economic equity – attempt to balance Economic equity – attempt to balance an economic policy so that everyone an economic policy so that everyone benefits fairly – (equal pay, hiring benefits fairly – (equal pay, hiring practices & disabled)practices & disabled)

The Goals of the NationThe Goals of the Nation Economic security – protection against Economic security – protection against

accidents, natural disasters, bank failures etc.accidents, natural disasters, bank failures etc. Economic stability – reduce extreme ups & Economic stability – reduce extreme ups &

downs in standard of livingdowns in standard of living Standard of living – the material well-being of an Standard of living – the material well-being of an

individual, group, or nation measured by how well individual, group, or nation measured by how well their necessities and luxuries are satisfiedtheir necessities and luxuries are satisfied

Economic growth – expansion of the economy Economic growth – expansion of the economy to produce more goods, jobs and wealthto produce more goods, jobs and wealth

Trade-Offs among goals – limits on what you Trade-Offs among goals – limits on what you can do with resources due to scarcity (Social can do with resources due to scarcity (Social Security)Security)

The Goals of the NationThe Goals of the Nation

Rights & ResponsibilitiesRights & ResponsibilitiesRight to enter any profession or business Right to enter any profession or business

you wantyou wantRight to work very little or a lotRight to work very little or a lotRight to buy what you wantRight to buy what you wantNeed to support yourself and your familyNeed to support yourself and your familyNeed to be a productive member of Need to be a productive member of

societysocietyNeed to have responsible governmentNeed to have responsible government

Goods & Services at SchoolGoods & Services at School EducationEducation Parking lot attendantParking lot attendant CustodialCustodial EntertainmentEntertainment Construction workersConstruction workers BathroomsBathrooms LunchLunch SAPSAP GuidanceGuidance

Post HS PlanningPost HS Planning Grades/Report CardsGrades/Report Cards Internet usageInternet usage Vending MachinesVending Machines Health servicesHealth services YearbooksYearbooks Church service timeChurch service time FundraisersFundraisers Secretarial ServicesSecretarial Services

TransportationTransportation Extra-curricularsExtra-curriculars Role ModelsRole Models Season PassesSeason Passes Announcers, Announcers,

scorekeepers etc.scorekeepers etc. Music lessonsMusic lessons WeightroomWeightroom VoiceVoice DisciplineDiscipline

WorkoutWorkout IntramuralsIntramurals LibraryLibrary SuppliesSupplies InfrastructureInfrastructure Social activitiesSocial activities SAT PrepSAT Prep DanceDance Software/HardwareSoftware/Hardware TrainerTrainer

Class tripClass trip RecyclingRecycling Peer mediationPeer mediation Locks/LockersLocks/Lockers Field tripsField trips PlaygroundPlayground NewsNews CarnivalCarnival ConcessionsConcessions

Special EducationSpecial Education TutoringTutoring ParkingParking PicturesPictures PTOPTO Community ServiceCommunity Service School to WorkSchool to Work Dual EnrollmentDual Enrollment TSSTSS