The American Economic System Basic Economic Unit Part II

Types of Economic Systems

Traditional Characteristics: How answer the economic questions? Little Change Based on Custom How answer the economic questions? How they always have

Command Characteristics How answer the economic questions? Government controls means of production Little individual influence Communism & Socialism How answer the economic questions? Government does

Socialism Gov. owns some factors of production and distributes products and wages

Communism Socialism under the dictatorship of the communist party

Market Characteristics: How questions answered? Private individuals control the factors of production Individual freedom How questions answered? By businesses and consumers

Mixed Characteristics: How are questions answered? Some individual freedom some government control How are questions answered? Individuals do but have some government intervention

All economies are actually mixed All economies are actually mixed. What determines whether an economy is considered market or command depends on the level of Government involvement.

Who developed the principles of a market economy? Adam Smith

What was the Wealth of Nations? Smith’s book that explained the principles of Capitalism

What did Smith mean by Laissez-faire economics? “To let alone” Government should stay out of marketplace except to ensure competition

The Invisible Hand Belief that individuals on their own would work for own self-interest Would be guided by “invisible hand” to use resources efficiently

Characteristics of Market/Free Enterprise System Little or no government intervention – governments role in econ. is to ensure competition Free Enterprise – Competition with little gov. interference Freedom of Choice – individuals can choose what work to do and what we buy

Characteristics Continued Private Property – right to own and use our property as we choose within certain legal limits Profit Incentive – the driving force of capitalism, the ability to accumulate wealth Competition – the struggle between buyers and sellers to get the best products at lowest prices

What does the Circular Flow Model illustrate? How resources, goods and services, and money flow in a circular pattern

Market The exchange of goods and services between buyers and sellers

Factor Market Where productive resources (the factors of production) are bought and sold

Product Market Market where goods and services (finished products) are offered for sale

What happens when less is exchanged in the circular flow? The economy shrinks, productivity goes down

What happens when more is exchanged? Economy grows, productivity increases

What is productivity? The amount of output that can be produced by a set amount of resources in a given period of time

Productivity Goes up when can produce the same amount of output in less time Or When can produce more output with same amount of resources in same time

Increasing Productivity Specialization when people, businesses or countries focus on what they do best Division of Labor breaking down of a job into small parts performed by different workers Investing in Human Capital spending to improve worker skills

What do these practices create between individuals, communities and nations? Economic Interdependence creates dependence between people for goods and services