1. Chapter 2

2.  Economic Systems- The way in which a nation uses its resources to satisfy its people’s needs and wants. Ex. Your wants and needs vs. Someone else's Every nation’s economic system has to answer these questions to help determine the most efficient way to satisfy their individual country’s needs and wants and to promote a strong national economy.

3. The Four Basic Economic Questions 1. How should goods and services be produced? 2. What and how much should be produced? 3. Who should produce what? 4. Who should share in what is produced?

4. The Four Basic Economic Questions How should goods and services be produced?  For each good and service produced, there is ALWAYS a trade-off.  A business must decide what combination of available resources will get the job done for the least cost

5. The Four Basic Economic Questions What and how much should be produced?  We live in a world of scarcity and trade-off.  If more of one item is produced, then less of something else will be produced

6. The Four Basic Economic Questions Who should produce what?  Within each economic system, different people do different jobs.  Who decides which people will produce which goods and services?

7. The Four Basic Economic Questions Who should share in what is produced?  Money payment for work, the amount of health care, education, food, and so on are all parts of the distribution of income.

8. Types of Economic Systems  Traditional System- The basic economic questions are answered by traditions/customs. Customs are handed down from generation to generation– very little changes. Very limited parts of the world. (Middle East, Africa, Asia and South America  Command (Contolled) System- The basic economic questions are answered by the government. Factors of production are controlled by the government– also called controlled systems.

9. Economic Systems, Cont.  Market System- The basic economic questions are answered by the market. Capitalism factors of production are privately owned and follow the concept of supply & demand.  Economic decisions are made through free interactions of individuals looking out for their best interest.

10. Economic Systems, Cont.  Market: Is the freely chosen activities between buyers and sellers of goods and services.  In a pure market economic system, producers of goods and services decide how to use their resources based solely on signals from the market Wants and Needs and the demand. 

11. Economic Systems, Cont.  Mixed Economic System- Uses a combination of command & market systems to answer the basic economic questions– most countries use a mixed economic system.

12.  Circular Flow of Economic Activity in a Market Economy- (two stages) Individuals sell the factors of production to businesses, who use them to produce goods and services. The money flows from business to individual in the form of rent, wages, interest and profits and it is returned to business by consumer spending.

14.  Basic concepts of the Command System was created by two Germans in the mid 1800s. Karl Marx and Friedrich Engles wrote The Communist Manifesto in 1848 and Das Kapital in 1867. Class struggle in society between the bourgeoisie and the proletariat.

16. Chapter 2, Section 2

17. Six Major Characteristics of the Market System 1. Little or no government control 2. Freedom of Enterprise 3. Freedom of Choice 4. Private Property 5. Profit Incentive 6. Competition

18.  Adam Smith- The Wealth of Nations (1776), described the market system. Individuals produce goods and services for their own benefit and indirectly help the economy/society of their country. These decisions about goods and services are determined by the theory of supply and demand. Adam Smith created the concept of the invisible hand to help changes that take place in a market system.

19. The Role of Government  Smith’s idea of the ideal economic system is called capitalism  Capitalism as in the USA is defined as an economic system on which private individual own factors that production and decide how to use with in the limits of the law

20.  Laissez-faire- (French), a policy that states that the government should exercise very little control in trade and industrial affairs– non-interference.

21.  The founding fathers of the United States agreed with Adam Smith’s theories and limited the role of the government to national defense and keeping the peace.  National and State Governments of the United States increased their role of regulating business and providing public services in the 1880s. The role of the governments in the U.S. greatly increased during the Great Depression (1930s).

22.  Freedom of Enterprise Individuals can own and control the factors of production No guarantee of success Governments place restrictions on some things ( child labor laws, special licensing, zoning laws, etc.)

23.  Freedom of Choice Consumers decide what is produced by buying it or not buying it (you vote for products you like) Demand determines what is produced -If a product doesn’t sell, the company looses money Government sets safety standards Government regulates price in some industries (ex. utility companies)

24. Private Property  Private Property Private property is property held by individuals or groups The Constitution guarantees an owner’s rights to private property. Individuals control how property is used- want to make a the best profit

25. Profit  Profit is the money left after all the costs of production have been paid. Includes wages, rent, interest and taxes  Government owns property Parks, fire-fighting and police equipment, military bases, municipal buildings and post offices.  The government cant expand its economic role by taking private property

26. Profit  Private Property is protected in the principals of the Bill of Rights. “Nor shall private property taken for public use, without just compensation.”  A federal, state, or local government believes it has to use private property it must pay the private owners.

27. Profit Incentive  Profit Incentive People produce goods to make a profit- money left after costs of production are paid (ex. Wages, rent, taxes, etc) Losses are a sign of inefficient use of resources- forces businesses to change in order to make a profit

28. Competition  Competition Competing businesses try to win customers with lower prices or better quality goods and services Businesses need to use resources efficiently to stay competitive (prices have to be low enough to attract buyers yet high enough to make a profit) In the U.S., most industries have weak barriers to enter but some (ex. Becoming a doctor) are more difficult

29. Easy Entry and Exit  Competition requires that companies enter and exit any industry they choose. Driven by profits Some companies expand into to industries while staying in the old one.  This creates weak barriers for entry and exit.  Certain industries have a tough entry Due to government regulations ○ Doctors and utilities

30. CH. 2, Section 3

31. Economic Goals  Economic Goals- of a nation are based on national values. Government policies are created based on these economic goals and national values. Government policies, economic and national values have to deal with the problem of scarcity.

32. The Economic Goals of the U.S. in a Market economy 1. Economic Efficiency 2. Economic Growth 3. Security and Equity** 4. Individual Freedom 5. Stability ** Equity (two meanings) 1. Value of property 2. fair and just

33. The Economic Goals of the U.S. in a Market economy  Economic Efficiency Using resource wisely so that people will be as well off as possible given our available resources

34. The Economic Goals of the U.S. in a Market economy  Economic Growth Expansion of the economy to produce more goods, jobs, and wealth. Some disagreement exist about whether or not to economic growth too often causes problems ○ Environmental pollution

35. The Economic Goals of the U.S. in a Market economy  Security and Equity Security means protecting people against poverty and supplying them with the means to provide for medical emergency through increasing number of government social programs Equity ○ Fair and just. Also value of property

36. The Economic Goals of the U.S. in a Market economy  Individual Freedom Goals of individuals freedoms allows each member of society to enjoy the freedoms of enterprise, choice, and private property and to make own decisions in the marketplace.

37. The Economic Goals of the U.S. in a Market economy  Stability Reduces extreme ups and downs in the standard of living ○ Material well-being of an individual, group, or nation measured by the average value of goods and services used by the average citizen during a given period of time. (usually a year)

38. Transfer Payments  Transfer Payments- taking money from one part of society and giving it to another part of society that is in need. (taxes)– Social Security, Medicaid & Medicare

39. Three benefits of the Market economy 1. High level of economic and personal freedom 2. High standard of Living 3. Diverse lifestyles

40. Three benefits of the Market economy  High level of economic and personal freedom Americans enjoy the highest degree of freedom ○ Can pursue own economic choices Individual have to accept the consequences of their decisions.

41. Three benefits of the Market economy  High standard of Living Higher standard of living is directly linked to the ability Americans about to make economic choices ○ Where to work, what to buy, Invest in any business

42. Three benefits of the Market economy  Diverse lifestyles People work part-time, nights and days. Command Economy has the least amount diverse lifestyles.