ECONOMIC PERSPECTIVES - CHAPTER 2

Economic Systems and the American System

Section 1

ECONOMIC SYSTEMS

MAIN IDEA:All economic systems face the same

basic questions.But first… What is an economic system?

The way in which a nation uses its resources to satisfy its people’s needs and wants

THREE BASIC QUESTIONS:

What should be produced?

How should it be produced?

For whom should it be produced?

REVIEW OF CHAPTER 1

1. The “choice/alternative” you give up when you make a decision is called ________________.

2. The way in which a nation uses its resources to satisfy its people’s needs and wants is ___________.

TYPES OF ECONOMIC SYSTEMS• System in which economic decisions are based on customs and beliefs that have been handed down from generation to generation

• Government controls the factors of production & makes decisions about their use

• Individuals own the factors of production and make econ. decisions through free interactions

• Combines the characteristics of more than one type of economy

Traditional economy

Command economy

Market Economy

Mixed economy

TRADITIONAL ECONOMY

•You know what is expected of you•Strong family and community tiesAdvantage

•Change in economy is discouraged and sometimes punished•Rarely have an increase in material well-being

Disadvantage

•Inuit of N. America•Mbuti of the Democratic Republic of Congo•Aborigines of AustraliaExamples

The “way it’s always been done”Career is what your parents did (ie. Fisherman)

COMMAND SYSTEM

•Individuals paid according to what central planners decide.•Might not be able to choose own career.•Lack of incentive to work hard•Lack of consumer choices

Disadvantages

•North Korea•Parts of the People’s Republic of China

Examples

Government is in control and makes all economic decisions

MARKET SYSTEM (AKA CAPITALISM) Market—more than just a “place” – it’s

a voluntary exchange of goods and services between buyers and sellers

•Individual choices (careers, how to spend money, own property, option to take risks and earn profits)•Competition provides choices and better products•Choices, choices, choices

Advantages

•Old, young, and sick that can’t work – who provides for them?

Disadvantages

MIXED ECONOMYMost countries have a mixed economy – including the United

States

Individual Level:

Local, State & Federal

Government

BARTERING Exchange of goods or services without

the use of money Thousands of years and is still happening Silent Trade

One group of traders deposits goods in a pre-arranged spot.

Second group either accepts goods and leaves some in return or rejects offering – first group then makes changes to offering and second group accepts or rejects

No contact is made between the two groups

CIRCULAR FLOW MODELBusinesses Sell goods and services to individuals

Individuals pay for goods and services they buy from business

Businesses pay for resources they buy from individuals

Individuals sell resources to businesses

Businesses Pay Taxes

Individuals Pay Taxes

Gov’t benefits to businesses

Gov’t benefits to individuals

CIRCULAR FLOW OF INCOME AND OUTPUT Charts in Motion http://glencoe.com/sites/common_assets/socialstudies/in_motion_08/ett/

Figure2-2.swf

SECTION 2Capitalism in the United States is best

defined as an economic system in which private individuals own the factors of production but use them within certain legislated limits.

SECTION 2 – CHARACTERISTICS OF AN AMERICAN ECONOMY

Main Idea – under Capitalism, government plays a relatively limited role in the allocation of resources

Since the 1880’s, the role of government (federal, state, and local) has increased significantly.

Capitalism – economic system in which private individuals own the factors of production

Laissez-faire – economic system in which the government minimizes the interference with the economy a French term meaning “let (people) do (as

they choose).” Limited Government includes –

regulation, safety, money supply, and taxes.

ADAM SMITH –

AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS.

Individuals left to their own would be guided as if by an “invisible hand” to use resources efficiently and thus achieve the maximum good for society.

SECTION 2Other Characteristics

In a free market, economic activity is coordinated by private businesses and individuals responding to market signals.

SECTION 2Other Characteristics (cont.)

The American economy is known as a free enterprise system. Individuals are free to own the factors of production and decide how to use them within legal limits; same as capitalism.

SECTION 2Other Characteristics (cont.)

Americans also have freedom of choice where buyers, not sellers, make the decisions about what should be produced.– At times, the government has intervened

in various areas of the economy to protect buyers and regulate price.

The goal of a business is to make a profit.• amount earned after a business subtracts

its costs from its revenues

SECTION 2Other Characteristics (cont.)

The desire to make a profit is referred to as profit incentive or profit motive.

The risk of failing, when profits are not realized, is also part of the free-enterprise system.

In a free-enterprise system, the lure of profits encourages competition.

For competition to exist, industry barriers to enter into, and exit from must be weak.

SECTION 2Other Characteristics (cont.)

Competition leads to an efficient use of resources since businesses are forced to keep costs of production as low as possible.

One of the most important characteristics of capitalism is the existence of private property.• whatever is owned by individuals rather

than by government

View: Characteristics of the American Economy

CHAPTER 7 – MARGINAL UTILITY Utility – the ability of any good or

service to satisfy consumer wants Marginal utility – an additional amount

of satisfaction to be gained by one more

LAW OF DIMINISHING UTILITY Rule stating that the additional

satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased