1. Economic Systems and the American Economy Chapter 2

2. Economic Systems Chapter 2, Section 1

3. Economic Systems Economic System: The way that a society uses its resources to satisfy the wants and needs of the people Each economic system address THREE questions: WHAT should be produced? HOW should it be produced? FOR WHOM should it be produced? FOUR economic systems: Traditional economy Command economy Market economy Mixed economy

4. Traditional Economy Traditional Economy: system in which economic decisions are based on customs and beliefs that have been handed down generation to generation. Decisions are made according to historical patterns. Your job is learned from your parents. Advantages: Family and community ties are strong. Roles are clearly defined. Disadvantages: Change is discouraged, so methods of production are often inefficient. Choice of consumer goods is limited. Standard of living does not increase over time or generation to generation. Examples: tribal communities such as the Inuit of North American or the Aborigines of Australia

5. Command Economy Command Economy: System in which the governments controls the factors of production and makes all decisions about their use. Economic decisions are made by the leader of the country, a small group of leaders or a group of central planners. Workers may not get to choose their own job. Workers are paid according to what the central government decides. Disadvantages: No incentive to work hard or show inventiveness as you cannot get ahead. Without inventiveness, production is inefficient. Limited consumer choices This is the type of economy in communist (and some socialist) countries. Example: North Korea, the former Soviet Union

6. Market Economy Market Economy: system in which individuals own the factors of production and make decisions about their use A market economy is a capitalist system. The role of government is limited – allowing individuals to make the economic decisions (three questions). Advantages: Freedom – free to choose your job and how to spend your money, free to own property, free to start a business and earn profits Efficient production since individuals are rewarded for ingenuity and hard work Many consumer choices Disadvantages: Individuals must sell their labor to survive – individuals who cannot or will not work cannot survive in this economy.

7. Market Economy (continued) Market Economy: system in which individuals own the factors of production and make decisions about their use Market: The process of freely exchanging goods and services between buyers and sellers. This exchange is driven by prices. This is the opposite of a command economy. Example: There are no pure market economies. The US is primarily a market economy but not purely.

8. Market Economy (continued) Circular Flow of Income and Output: economic model that pictures income as flowing continuously between businesses and consumers

9. Mixed Economy Mixed Economy: system combining characteristics of more than one type of economy. Most mixed economies are a combination of command and market economies. Private ownership of property and individual decision making are combined with government intervention and regulation. Examples of government involvement in mixed economies: Government consumes and produces goods (military, roads, schools) Government may own some factors of production (such as natural resources) Transfer programs – taking taxes from some citizens and giving the money to the poor, elderly or disabled (welfare, medicaid) Example: The US is a mixed economy – it is a combination of market and command economies

10. Characteristics of the American Economy Chapter 2, Section 2

11. The Limited Role of Government in the American Economy America is capitalist – an economic system in which private individuals own the factors of production. Laissez-faire: a French term “let the people do as they choose” It refers to a pure capitalist system. In America, individuals own the factors of production but use them within certain legislated limits. The role of the government in our economy is limited but has grown over the last 100 years. Federal agencies regulate the quality of food and drugs Federal government oversees the nation’s banking system Government inspects workplaces for hazardous conditions Government guards against damage to the environment Government uses tax revenues to provide social programs to the elderly, poor and disabled State and local governments regulate education

12. Characteristics of the American Economy Limited Role of Government Freedom of Enterprise – Individuals are free to own the factors of production and decide how to use them within legal limits. Free-enterprise system = capitalism = market economy Freedom of Choice – Buyers decide what will be produced based on buying or not buying a certain product. Profit Incentive – The desire to make a profit that motivates people to produce goods and services. Profit: Business revenues minus costs Competition – rivalry among producers of similar goods and services to win more business. Private Property – Property can be owned by individuals or groups of individuals rather than by the government.

13. Goals of a Nation Chapter 2, Section 3

14. Remember… Free-Enterprise System = Capitalism = Market Economy The US is a technically a mixed economy but it is much more market economy and less command economy

15. Goals of Free-Enterprise Freedom – Individuals have choices: what to buy, what to produce, what to own, what to do for a living, how much to work. With freedom come costs – if you start a business that fails, the government usually won’t help you. Economic Efficiency – wise use of scarce resources to obtain the greatest possible benefit If we waste resources, we won’t have as many goods. Economic Equity – the attempt to balance economic policy so that everyone benefits fairly. Equal pay for equal work, fairness in hiring Economic Security – protection against risks beyond our control (accident at work, bank failure, natural disasters, poverty in old age)

16. Goals of Free-Enterprise (continued)… Economic Stability – reducing extreme ups and down in our standard of living: material well-being of a person, group or nation measured by how well their necessities and luxuries are satisfied. Economic Growth – expansion of the economy to produce more goods, jobs and wealth.

17. Rights and Responsibilities in Free Enterprise Rights Enter any profession or business you choose Work very little or even be a “workaholic” Buy whatever products and brands you choose Responsibilities Support yourself and your family Use you education to become a productive member of society Elect responsible government officials – this means having knowledge of government policies and being able to analyze those policies

18. Socialism and Capitalism Chapter 2, Section 4

19. Socialism Pure Command Socialism: a system in which the government owns the major factors of production and attempts to manage output and the distribution of goods There are few examples of this: North Korea and Cuba and the former Soviet Union

20. Socialism Marxian View of Socialism: Marx’s view is that capitalists (owners of businesses) exploit workers. He believed that since the workers made the goods, the workers should get the profits, not the owners. Marx believed that capitalism would make the workers poor and the workers would rise up and overthrow capitalism. Then the government would own the factors of production, creating socialism. Marx also believed that socialism would evolve into communism: an idealized society where there is no government; “society” not individuals would own the factors of production. This exists nowhere today In reality, communist countries have very powerful central governments, not “no government”.

21. Socialism In the 20 th century, two types of socialism developed: Democratic Socialism: system that works within a constitutional framework of a nation to elect socialists to office; the government usually controls only some areas of the economy. Many countries have this system. Authoritarian Socialism: system that supports revolution as a means to overthrow capitalism and bring about socialist goals. The entire economy is controlled by a central government – also called communism. Examples: North Korea, Cuba, the former Soviet Union.

22. Criticisms of Socialism Government interference in the economy Limited personal freedoms Low production efficiency Slow rate of economic growth

23. Capitalism Benefits Freedom Better efficiency Higher rates of economic growth Planning is shared by individuals, businesses and government Criticisms Not all people have the same income level Government does not provide enough services for people