Evaluating Economic Performance and Capitalism Chapter 2

Economic and Social Goals Every society has ideals and goals for what they want in their system Every society has ideals and goals for what they want in their system This could include high standard of living or freedom This could include high standard of living or freedom In the U.S., the following are our economic goals In the U.S., the following are our economic goals

Economic and Social Goals Economic freedom: Freedom to make our own decisions, produce what we want, etc. Economic freedom: Freedom to make our own decisions, produce what we want, etc. Economic efficiency: Benefits gained are greater than costs incurred Economic efficiency: Benefits gained are greater than costs incurred Economic equity: Justice, impartiality, and fairness Economic equity: Justice, impartiality, and fairness

Economic and Social Goals Economic Security: Protection from adverse economic events (why we have Social Security, Unemployment, Medicare, etc.) Economic Security: Protection from adverse economic events (why we have Social Security, Unemployment, Medicare, etc.)

Economic and Social Goals Economic Stability: Stable prices (no inflation—a rise in the general price level). Inflation increases interest rates & discourages businesses from borrowing and spending. Economic Stability: Stable prices (no inflation—a rise in the general price level). Inflation increases interest rates & discourages businesses from borrowing and spending. Economic Growth: We want better jobs, products, services, and opportunities in the future Economic Growth: We want better jobs, products, services, and opportunities in the future

Capitalism Our economy, and most market economies, is based on capitalism. Our economy, and most market economies, is based on capitalism. Capitalism is a system where private citizens (many of whom are entrepreneurs) own the factors of production. Capitalism is a system where private citizens (many of whom are entrepreneurs) own the factors of production. Free enterprise is another term used to describe the U.S. economic system. Free enterprise is another term used to describe the U.S. economic system.

Capitalism In a free enterprise system, competition is allowed to flourish with minimum government influence. In a free enterprise system, competition is allowed to flourish with minimum government influence.

6 Characteristics of a Free Enterprise System 1.Freedom of Choice 2.Freedom of Enterprise—buyers and sellers freely and willingly engaging in market transactions 3.Private property rights—people own and control their possessions as they wish

6 Characteristics of a Free Enterprise System 4.Profit Incentive—people are free to risk their savings or any part of their wealth in a business venture -- profit is the extent to which persons or organizations are better off at the end of a period than they were at the beginning --profit incentive—the driving force that encourages people and organizations to improve their material well-being

6 Characteristics of the Free Enterprise System 5.Competition—the struggle among sellers to attract consumers while lowering costs—is the driving force that keeps prices low in a free enterprise system

6 Characteristics of the Free Enterprise System 6.Limited Role of Government – Adam Smith – author of the Wealth of Nations – often called the “father of economics.” He described a system in which government has little to do with a nation’s economic activity - “invisible hand” He described a system in which government has little to do with a nation’s economic activity - “invisible hand”

The Role of Government Protector—enforces laws Protector—enforces laws Provider and Consumer—provide public services (such as parks, roads, etc) and consumes factors of production to produce these services Provider and Consumer—provide public services (such as parks, roads, etc) and consumes factors of production to produce these services Regulator—preserves competition in the marketplace (no monopolies) Regulator—preserves competition in the marketplace (no monopolies) Promotes national goals Promotes national goals