What is economics? Economics: the production, distribution, and consumption of goods and services. “The Economy” is the exchange of goods and services in a community. Capitalism: when “economics” is primarily a function of individuals and private corporations, NOT the state.

CAPITALI$M

Key Economic-Political Questions Who should decide what goods and services will be produced? Individuals (private) or the govt. (public)? How should goods and services be distributed and exchanged within a state? Should the govt. try to “spread the wealth”? What social services should a govt. provide? Should the govt. establish a “safety net” to help the “losers” in capitalism?

The Basics to ALL Economies: The 4 Factors of Production Land ALL natural resources (water, farming, mining, forestry, coal, oil, etc.). Labor Capital Human-made resources that are used for economic activity. Money, buildings, machines, computers, knowledge/skills. Entrepreneur A person with the drive to combine land, labor, and capital resources to produce goods and/or offer services.

Origins of Capitalism Adam Smith’s The Wealth of Nations (1776) argued that when all individuals are free to pursue their own private interests, an “invisible hand” works to promote the general welfare. The govt. should play a very limited, laissez-faire (“hands off”) role in society: defense and foreign relations, and police and courts to protect private property, health/safety, and the free market.

Capitalism in the U.S. NO nation has a truly laissez-faire, free enterprise system. Most capitalist nations, like the U.S., have a MIXED economy (private enterprise + govt. participation/regulation). Most people believe that the govt. should have a stake in “promoting the general welfare” of the people.

OUR Economic System: The Free Enterprise System/Capitalism Private Ownership The factors of production are owned by individuals, NOT by the public (govt.) Individual Initiative NOT centralized govt. decision-making about the economy Profit This is the reason entrepreneurs are willing to take risks! Competition This creates free markets: consumers, workers, and entrepreneurs all have freedom of choice

More about Competition… In a free enterprise economy, prices are determined by the Law of Supply and Demand. When demand for a product goes UP, prices go UP. When supplies of a product go UP, prices go DOWN. (Think iPods and iPhones.) Competition helps to hold down prices AND keep product quality high because consumers try to buy the best product at the lowest price. The govt. keeps competition in the marketplace by preventing and breaking up monopolies (companies that have a stranglehold on a certain market).