The American Economic System GOAL 7 NOTES

What is Economics?  Economics is the study of how individuals and countries decide how to use scarce resources to produce needed goods and services.

3 Basic Economic Questions  We do this by answering 3 basic economic questions:  (1) what and how much should be produced?  (2) How should the goods and services be produced?  (3) How the goods will be distributed?

Why Study Economics?  The main reason is scarcity. Scarcity is, having unlimited wants but having limited resources. Scarcity is the #1 economic problem

Economizing  We are forced to make economic choices. This is called economizing, or making the best economic decision on how to use scarce resources. By studying economics we can make better- educated economic choices

Trade-offs  In making economic choices, we must make trade-offs. A trade-off is choosing what we want. By making a trade-off we must also give something up. (Ex. Working over studying.)

Opportunity Costs  Opportunity Costs are what you give up when you make an economic decision. (Ex. failing a test.)

Economics in our society We have a high standard of living in this country, here are some reasons:  Resources, we have an abundant supply and variety.  Technology, advanced machines and computers.  Mass Production, producing goods in large quantities. Two techniques that were developed that aided in mass production were, interchangeable parts, developed by Eli Whitney, and the assembly line, developed by Henry Ford.  Automation, using machines to produce products.

Factors of Production  Factors of production are the essential components that producers use when manufacturing goods in the US.  There are 4 factors of production.

The 4 Factors Are……  Land- all of the resources and materials used in making a product  Labor- all of the human physical activity used in making a product  Capital- the machines, tools, and buildings used in making a product  Entrepreneurship- the risk taker, ideas, decision maker, and organizer of a business. They decide how to use the Factors of Production, so that they can be used efficiently.

Types of business organization in the United States  Sole Proprietorship- The largest type of business organization in the US. About 19 million of these in the US. These are businesses that are owned and operated by one person or a married couple. Sole Proprietorships are usually locally owned and operated.  Advantages—You are the boss, you decide what to make, you set the prices, you set the hours of operation, and you receive all of the profits  Disadvantages—You assume all of the risks, you invest all of the money to start the business, you pay all of the bills, you must stand behind your product, and you lose all of your money if the business fails.

 Partnership- A business that 2 or more people own. Usually larger than a sole proprietorship, but still pretty small. People usually start partnerships to pool their money together to start the business, to combine different talents, and to share the workload.  Advantages—They share in the financial risk, and if the business fails both are liable.  Disadvantages—There could be disagreements between the partners, and if one partner dies, a new partnership must be formed

 Corporations- are businesses that have many owners. These are large businesses that sell stock in their corporation to raise money for investment. The investors are gambling that the corporation will turn a profit. There are two types of stock--- common stock, in which the investor receives a dividend if the company makes a profit for that year, and preferred stock, the investor receives a fixed dividend each year. Preferred stockholders can vote on who runs the corporation (ceo). 90% of all products produced in the US are produced by corporations.

Corporations Continued….  Advantages—There are many people who share the risk, stockholders have limited liability, and there is more money to invest and expand the company.  Disadvantages—The company may become too large and over expand, there are also power struggles and hostile takeovers that could hurt the company.

Types of economic systems  An economic system is the way a country tries to answer the 3 basic economic questions.  The what, the how, and the who.  There are 4 main types of economic systems in the world today.

Traditional Economic System  This system is used by more primitive, less complex societies. This system uses customs and traditions to answer the basic economic questions. Some examples are Inuits and tribal cultures. These are labor intensive, and most of the work is done by hand.

Command Economic System  The government controls all economic activity and answers the economic questions. Individuals have almost no free will or choice in what is produced. This is known as communism, and it is used in China, Cuba, and in North Korea

Free Market Economic System  (capitalism), the consumers and producers answer all of the economic questions by interaction in a free market; the government has a limited role, mostly in the form of consumer protection. This is also known as free enterprise, and is used in the United States.

Mixed Economic System  The economic questions are answered by the government and by the people. There is some government ownership of business, this is called nationalization. This system is also known as socialism, and is currently used by France, Great Britain, and Canada

Examination of the factors of production  Land- Also known as natural resources or raw materials that products are made from. If a country is going to be successful, they must have a high quality and quantity of natural resources. This is one of the primary reasons that the US has a successful economy

Conservation  is the saving and wise use of natural resources. This is critical because we have a limited supply of resources

Renewable v. Non- renewable . Some resources are non-renewable; they can only be used once. Some examples are gas and coal which are fossil fuels.  Other resources are renewable, which means they can be used over again, or recycled. Some examples are paper, glass, and aluminum. Recycling has become a major element in the conservation process.

Labor  is the human physical and mental activity that goes into making a product. Because of self- interest, or profit, most Americans have a strong incentive to work hard and improve their skills as a worker. Today’s industry requires more skilled workers than unskilled ones. Education is a key, and there is an emphasis placed on job training.

Four reasons why the US is so productive  Better training and higher levels of education  Higher wages and more job benefits  Workers compensation and laws to protect workers  More incentive to make money, or self interest

Advantages of being a skilled worker  Less physical labor  Higher pay  More benefits—paid vacations, sick leave, and a retirement program  Prestige—more status in society

Capital  All of the tools, machines, and buildings used in making a product. This factor of production relies on land and labor to be effective. Businesses always search to improve capital technology. Some improvements have been, computers, robots, and lasers

Entrepreneurship  The organizer, the person who organizes the factors of production. They invest the money, and take the risks in order to make a profit on their investment.

Productivity  The measure of how much can be made with a set amount of resources. Concentrates on keeping waste to a minimum. Relies greatly on accountability.

Ways to increase productivity  Job training for workers  Better organization of business. Reorganizing is also called downsizing.  Worker input, or ideas from workers. This is called site-based management.  New technology

Factors that contribute to high productivity in the US  High quality of resources  Lack of cultural barriers  Unified as one country, the states are under one government  Advanced infrastructure—roads, bridges, and transportation systems  An overall stable climate.

Division of labor  enhances productivity; this is dividing the product making process into separate jobs

Specialization  is becoming an expert in one part of the production process. This helps to utilize a workers talents and abilities. Being trained in only one job speeds up production. Examples are, doctors, lawyers, and teachers.