1. Unit 8.2 Types of Economies Notes- Answers
Complete the Structured Notes as you view the Power Point.

2. Standards: Essential Standards:
CE.E1.2 Analyze a market in terms of economic characteristics, the roles they play in decision-making and the importance of each role
CE.E1.4 Analyze the ways in which incentives and profits influence what is produced and distributed in a market system
CE.E1.5 Compare how various market structures affect decisions made in a market economy

3. Unit 8.2: Chapter 19 The American Economy Section 2 Economic Activity

4. Chapter 19: The American Economy Standards: 1.2,1.4: Section 2
Circular Flow of Economic Activity:
Circular Flow- Shows how economic decisions in a market economy are made by Households, Businesses, and the Government (and in foreign markets)
Household (Consumer) Sector- the people who earn and spend money
Business Sector- where people earn and spend money
Government Sector- federal, state, and local governments
Foreign Sector- all countries in the world

5. Factor Market

6. Chapter 19: The American Economy Standards: 1.2,1.4: Section 2
Economic Interdependence of the Circular Flow:
Households- provide labor and buy goods and services with money they earn from businesses and the government
Businesses- produce goods and services and buy goods and services to help run their business with money from consumer purchases and government subsidies
Government- produces goods and services, buys goods and services, with money collected in taxes and fees from households and businesses
Foreign- Households, Businesses, and the Government buy and sell from countries around the world

7. Chapter 19: The American Economy Standards: 1.2,1.4: Section 2
Product and Factor markets:
Factor Market- Where the factors of production are used to make products
Where producers earn a profit
Product Market- Where final goods and services are sold
Computers, shoes, pencils, hair, clothes, iPods, phones, etc.
Business use money earned to buy more resources to make more products

8. Factor Market / Product Market

9. Chapter 19: The American Economy Standards: 1.2,1.4: Section 2
Gross Domestic Product (GDP) - a measure of how many goods and services are produced in a year to indicate how the economy is doing

10. Chapter 19: The American Economy Standards: 1.2,1.4: Section 2
Global Interdependence: Our country relies on other countries to provide us with goods and services and other countries rely on us to provide them with goods and services- Countries around the world rely on each other to provide the goods and services they need
Events in one country or another part of the world can have a dramatic impact on trade in other parts of the world

11. Poll
How can a tornado in China possibly hurt our economy?

13. Unit 8.2: Chapter 19 The American Economy Section 3 Capitalism and Free Enterprise

14. Chapter 19: The American Economy Standards: 1.2,1.4: Section 3
Capitalism:
The economic system of the United States is Capitalism
In Capitalism private citizens own and use the factors of production to make a profit
In Capitalism the economy operates with free markets and private ownership
Free Enterprise:
In the Unites States’ economy competition is allowed with little government interference

15. Poll
Give an example of one way the government is involved our businesses.

17. Chapter 19: The American Economy Standards: 1.2,1.4: Section 3
6 Features of Capitalism:
1. Markets
2. Economic Freedom
3. Private Property Rights
4. Competition
5. Profit Motive
6. Voluntary Exchange

18. Chapter 19: The American Economy Standards: 1.2,1.4: Section 3
Markets: Places where prices are determined and buying and selling takes place (exchanges)
Review Chart on page 522
Consumers and businesses interact in product and factor markets
Your labor is sold in the factor market
Goods and services are purchased in the product market
The consumer determines what will and will not be produced based on if it is purchased or not “Consumer Sovereignty”

19. Markets

20. Chapter 19: The American Economy Standards: 1.2,1.4: Section 3
Economic Freedom: We are free to make our own economic choices
Where we shop, what we buy, what we produce, where we work
We must live with the consequences of our choices
Private Property Rights: We are free to do whatever we want with our own property as long as we don’t bother other people’s rights
People usually take better care of things they own

21. Chapter 19: The American Economy Standards: 1.2,1.4: Section 3
Competition: Struggle between buyers and sellers to get the best products at the best possible price
Between sellers it keeps cost of production low and quality high
Forces least efficient producers out of business
Makes for efficient production, higher quality products, and more satisfied customers

22. Poll
How does competition keep prices low?

24. Chapter 19: The American Economy Standards: 1.2,1.4: Section 3
Profit Motive: Drives people to improve their financial status
People are allowed to make as much money as they can in business
Profit is the money left over after all expenses have been paid
Voluntary Exchange: Buyers and sellers freely participating in market transactions
Buyers and sellers benefit in the exchange

25. Chapter 19: The American Economy Standards: 1.2,1.4: Section 3
Adam Smith- wrote book “The Wealth of Nations”- described the basic principles of a free market economy
Adam Smith believed that people would work for their own self interest if left on their own without government interference
Their self interest would be guided by an invisible hand that would encourage them to use resources efficiently

26. Invisible Hand

27. Chapter 19: The American Economy Standards: 1.2,1.4: Section 3
Laissez-faire Economics- a French term meaning the government should not interfere in business- government’s role is limited to actions needed to ensure free competition in the marketplace

28. Unit 8.2: Chapter 26 Comparing Economic Systems Section 2 Economic Systems

29. Chapter 26: Comparing Economic Systems Standards: 1. 2,1. 4, 1
Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2
Market Economies
All societies must ask and answer the basic economic questions
What to produce
How to produce
For whom to produce
The answers to these questions determine the type of economic system a country will have
Market Economy-decisions are based on supply and demand
Market Economy is also known as Capitalism

30. Poll
What is another name for a Market Economy?

32. Chapter 26: Comparing Economic Systems Standards: 1. 2,1. 4, 1
Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2
Characteristics of a Market Economy
Private citizens (not the government) own the factors of production
Businesses answer the questions of What? How? For Who?
Businesses answer these questions based on their desire to make a profit
Consumers decide what to buy
Supply and demand interact to set prices
Producers and consumers make their own decisions
All the people in a market economy make decisions- this makes it look like the economy runs by itself because no one coordinates the decisions

33. Chapter 26: Comparing Economic Systems Standards: 1. 2,1. 4, 1
Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2
The government makes sure markets are competitive
Consumers benefit from competition
The government makes sure there are enough businesses to ensure competition by regulating business
Externalities- unintended side effects that have influence on a third party
Government influence externalities
Laws against pollution that can help all people
Fund scientific research that can lead to new discoveries for everyone
Per Capita GDP is high
Total GDP divided by the country’s population

34. Chapter 26: Comparing Economic Systems Standards: 1. 2,1. 4, 1
Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2
Command Economies
Characteristics of a Command Economy
Command Economy is the opposite of a Market Economy
Economic systems are different than political systems
The United States has a democratic political system and a market economic system
Great Britain has a democratic political system and socialism as their economic system

35. Poll
Who makes all economic decisions in a Command Economy?

37. Chapter 26: Comparing Economic Systems Standards: 1. 2,1. 4, 1
Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2
In a pure command economy individuals have little (if any) influence over how the economy runs
Major economic decisions are made by the government
The government gives producers commands
Socialism- the government owns the factors of production
Communism- all people are equal and everyone shares ownership of the means of production
Karl Marx was a socialist- believed population of industrialized nations is divided into owners (the haves- bourgeoisie) and workers (the have nots- proletariat)

38. Chapter 26: Comparing Economic Systems Standards: 1. 2,1. 4, 1
Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2
Marx predicted a violent revolution from the workers against the owners
Marx believed socialism would develop into communism
Communism never developed into the equality Marx had envisioned
In a command economy the government answers all the “Who, What, How” questions
In a command economy the government sets workers wages and product prices
Command Economies have a lower Per capita GDP than Market Economies
Examples- Cuba and North Korea

39. Chapter 26: Comparing Economic Systems Standards: 1. 2,1. 4, 1
Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2
Mixed Economies
Mixed Economy- Economic system with elements from more than one type of system
Most countries have a form of mixed economy
United States has Capitalism with Free Enterprise- people own the factors of production but the government keeps competition free and fair and protect s the public interest

40. Poll
How does the United States have a Mixed Economy?

42. Chapter 26: Comparing Economic Systems Standards: 1. 2,1. 4, 1
Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2
The government provides services to businesses and consumers
Federal and State maintained roads and highways help transport goods
Government agencies produce and distribute goods and services to consumers

43. Chapter 26: Comparing Economic Systems Standards: 1. 2,1. 4, 1
Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2
Direct Role- government provides a good or service that competes with a private business
Postal service vs. UPS or FedEx
Indirect Role- government acts as an umpire to make sure the economy runs smoothly and efficiently
Regulation of public utilities (ex. water or electricity)

44. Economy
Definition
Reminder
Capitalism
Economic system in which private citizens own and use the factors of production in order to make a profit
United States
Traditional Economy
System in which the decision of what, how and for whom things are produced are made by custom or habit
Command Economy
Economic system in which the government owns the factors of production and makes all economic decisions- distribution based on equality
Socialism and Communism
Socialism
Economic system where society controls all economic decisions- not individual people like in Capitalism- (In Socialism Government is part of society)
Great Britain
Communism
In Karl Marx’s book “The Communist Manifesto” he described a classless society where all people owned all property equally and government was not needed
Marx’s idea did not happen- Communism became a system where the government owned all property and makes all decisions- Cuba
Market Economy
Economic system in which factors of production are privately owned with very little government control- supply determined by demand- prices determined by competition
Mixed Economy
Economic system with elements from more than one type of system
United States has Capitalism with Free Enterprise- people own factors but government has a limited role to supervise

45. Poll
Did Communism work out the way Marx had wanted?

47. Unit 8.2: Chapter 26 Comparing Economic Systems Section 3 Economies in Transition

48. Poll
Identify a country that has a Socialist economy.

50. Chapter 26: Comparing Economic Systems Standards: 1. 2,1. 4, 1
Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 3
Changing Economies
Many countries are changing their economic systems to try to improve the economy of their country
Failure of Command Economies
In the late 1980’s command economies were unable to achieve the same economic growth of market economies
In Eastern Europe the economic changes occurred with political changes as well- many countries moved toward democracy

51. Poll
Who owns the factors of production in Capitalism?

53. Chapter 26: Comparing Economic Systems Standards: 1. 2,1. 4, 1
Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 3
Russia
1991 the Soviet Union collapsed
Communist leaders could no longer keep the economy going
Russia was the largest country to come out of the breakup of the Soviet Union
The problem with the changeover was that people had to learn how to operate a market economy
How to own a company
How to make supply and demand decisions
How to operate a stock market
The change is a slow process

54. Chapter 26: Comparing Economic Systems Standards: 1. 2,1. 4, 1
Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 3
China
China began to introduce a market economy to compete with other market economies
China’s economy has grown rapidly since the late 1990’s
Problems: farmers can’t compete with cheaper foreign food, very high unemployment

55. Chapter 26: Comparing Economic Systems Standards: 1. 2,1. 4, 1
Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 3
Developing Countries
Economic Characteristics
Only 35 of 200 countries in the world are considered developed nations
United States, Great Britain, Spain, Japan, Australia, Republic of China
Developing Country- country whose average per capita income is only a fraction of that of a more industrialized country
Traditional Economy- System where economic decisions are based on custom or habit

56. Chapter 26: Comparing Economic Systems Standards: 1. 2,1. 4, 1
Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 3
Problems Developing Countries Face
High population growth- when population grows faster than GDP each person has a smaller share of what is produced
Rapid population growth causes many problems
Lack of food
Lack of housing
Lack of natural resources
Lack of access to ocean trade routes
War
Debt- many countries borrow money to increase economic growth but cannot pay back the debt
Government corruption will slow the development of a country

57. Chapter 26: Comparing Economic Systems Standards: 1. 2,1. 4, 1
Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 3
Growth and Development
Developing countries are responsible for their own economic development
The World Bank suggested developing countries invest more in people
Education
Family planning
Nutrition

58. Poll
How can we invest in developing countries to help them grow?

60. Chapter 26: Comparing Economic Systems Standards: 1. 2,1. 4, 1
Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 3
The World Bank suggested that competitive markets- not government officials- should make the “What, How, and Whom” decisions
It is better for developing countries to open their trade with other countries than to limit trade with barriers and tariffs