1. Chapter 2
Every society has an economic system to allocate goods/services
Not all nations offer their citizens the same economic choices that we have.
--Careers
--Purchases
--Owning a business

2. Economic Systems
Economic systems – way nations determine how to use resources
All economic systems answer three basic questions: what to produce, how to produce, and for whom to produce.

3. What Should be Produced?
What is an example of a company that stopped producing one item so it could devote more resources to producing a different item?
Other examples
Gov’t decides to build new roads which means fewer resources to maintain nat’l parks

4. How Should it be Produced?
Then must decide best combination of inputs to produce the good/service
Laborers (skilled or unskilled)
Use capital goods to produce which will limit labor needed?

5. For Whom Should it be Produced?
Our economic system we live in determines how goods/services are distributed
In US most g/s are distributed to individuals and business through the price system
Other countries might… majority rule, lottery, first-come/first-serve, equally or military force

6. Types of Economic Systems
How answer basic questions determine which system
Keep in mind… there is no PURE system
(Controlled)
(Capitalism)

7. Traditional
Economic decisions based on customs/beliefs from previous generations
Advantages
Know what is expected & family/community ties strong
Disadvantages
Change is discouraged and possibly punished
Methods of production insufficient
Democratic Republic of the Congo in central Africa,& Aboringines of Australia
If male, you would be what your father was (fisherman)

8. Command (Controlled)
Government makes all decisions regarding the factors of production
Paid according to central planners
Can’t choose your career
Disadvantages
No incentive to work hard or effieciently
Less consumer choices
North Korea, parts of the People’s Republic of China
Similar to traditional in that indivuduals have little influence over how the basic economic questions are answered

9. Market (Capitalism)
Individuals own the factors of production and make decisions to better their family’s
Market – freely exchanging g/s between buyers & sellers
Prices signal what is bought/sold
High (scarce) or low (abundant)
High price – goods might be scare
Low price –relatively abundant

10. Circular Flow Chart (indicates how market system works)

11. Market Advantages One disadvantage Choose career Spend how you wish
Own property
Take risks and earn profit
One disadvantage
Fear survival of young, old, disables w/out help from government

12. Mixed Combines pure market and command to form a system
Most countries have
Individuals can own property and make decisions but have government regulations to follow

13. Who controls factors of production for each system?
(Customs/Beliefs)
(Government)
(individuals & gov’t)
(Private individuals)

14. The American economy is defined by six basic characteristics.

15. Limited Role of Gov’t Market System (Capitalism)
Pure Capitalism referred to laissez-faire (let people do as they choose)
Let people make decisions w/out gov’t interference
In US, individuals own factors of production but use w/in legislated limits
Economist Adam Smith in 1776

16. Limited Role of Gov’t
At first gov’t limited to nat’l defense and keeping peace
Now..
Regulate quality of foods & drugs
Watch over money/banking system
Inspect workplaces for hazardous conditions
Protect environment
Tax revenues to support SS & Medicare

17. Freedom on Entrerprise
US also known as free-enterprise system
Economic system in which individuals own factors of production & decide how to use them
Want to start a business?
You can. Might be successful or might fail.
Gov’t has legal restrictions
Zoning regulations, child labor laws, etc.

18. Freedom of Choice Buyers (not sellers) choose what should be produced
Sometimes gov’t intervenes..
Safety standards on toys, cars
Public utilities (gov’t might regulate prices)
New video game comes out – if no one buys then won’t make or might not higher the designer again

19. Profit Incentive
Profit is amount left after all costs of production have been paid
Profit Incentive is the desire to make a profit
Profits & losses lead to economy that is more efficient and continually growing
If not successful, then entrepreneurs move resources elsewhere

20. Competition Profits encourages competition
Competition is rivalry among producers/sellers of similar g/s to win more business
Competition leads to efficient use of resources
Keep prices low enough but still earn profit
Forces business to keep production costs low

21. Private Property
As long as have money, you can buy land, car, business, etc.
Also control how, when & by whom uses your property

22. Goals of Free Enterprise
US has a free enterprise (capitalist) system
Goals are…
Freedom
Efficiency
Equity
Security
Stability
Growth

23. Freedom We have one of the highest degrees of freedom Start business
Own private property
Make decisions in marketplace
We as individuals must face the consequences of our freedom choices

24. Economic Efficiency
Economic efficiency is wise use of available resources to obtain the greatest benefits
B/c of scarcity, must be careful to not waste and produce goods at low costs

25. Economic Equity
Attempt to balance economic policy so everyone benefits fairly
Encourage policy makers to pass laws..
Equal pay for equal work
Fair hiring practices

26. Economic Security Protection against risks beyond our control
Our system provides security through a number of government social programs
Accidents on job
Natural disasters
Old age

27. Economic Stability
Goal is to reduce extreme ups and downs in standard of living
Standard of Living is the materials well being of an individual, group or nation measured by how well necessities and luxuries are met
Measure by value of g/s used by average citizens in given time period
US has more individuals enjoying a high standard of living than almost anywhere else in world

28. Economic Growth
Economic Growth is expansion of the economy to produces more goods, jobs & wealth

29. Rights & Responsibility of F.E.
Have many rights
Choose, career, work little or a lot
Responsibilities
Support family
Electing gov’t officials

30. Pure Command Socialism
There is little private property and the state owns the factors of production
Most extensively controlled economies today are North Korea and Cuba

31. Pure Socialism Characteristics
Prices set by state
Movement of resources (particularly labor) strictly controlled
State owns factors of production
Individual risk taking is not allowed
Economic decisions (3 ?’s) made by state officials
Taxation is often used to redistribute income

32. Benefits of Capitalism
Economic efficiency
Individual freedom

33. Disadvantages of Capitalism
Critics say…
Income is unequally distributed
Not enough schools and museums for general public