2.economic system and the american economyPresentation Transcript
Chapter 2 Economic Systems and the American Economy*
Learning Goal: Explain how economicsystems answer basic questions aboutproduction and distribution of goods andservicesSection 1 Economic Systems*
Define economic system
Way in which a nation uses its resources to satisfy its people’s needs and wants*
What three questions must all economic systems answer?
• What should be produced?* • How should it be produced?*• For whom should it be produced?*
Does a pure economic system really exist?
No- they are all mixed economies to some degree
What are the major types of economic systems and their differences?
• Traditional• Command • Market • Mixed*
Define traditional economy
System in which economic decisions are based on customs and beliefs that have been handed down from generation to generation*
Traditional • Answers the three basic questions according to tradition• Things are done, “the way they have always been done.” • Economic decisions are based on customs and beliefs-often religious- handed down from generation to generation*
Traditional Examples • Inuit of North America• San of the Kalahari in Africa • Aborigines of Australia
Traditional Advantages: • Everyone knows their role• Little uncertainty of what and how to produce, for whom is usually themselves
Traditional Disadvantages:• Discourages new ideas/technology • Punishes people who break rules • Lower standard of living
Define command economy
System in which the governmentcontrols the factors of production and makes all decisions about their use*
Command • Government decides questions of production• Example: Former USSR , Cuba, North Korea, and China
Command Advantages: • Speed in which resources can be rerouted (agriculture to industry)• Little uncertainty-decisions made for you • Some education, healthcare, public services, available at little or no cost
Command Disadvantages:• Not designed for customer wants-basic needs provided • Sacrifice for the good of the state and benefit for future generations
Command Disadvantages:• No incentive to work hard-just enough to fill quota • Large bureaucracy
Command Disadvantages:• Little flexibility-discourages change • Individual abilities not considered*
Define market system
System in which individuals own the factors of production and make economic decisions through freeinteraction while looking out for theirown and their families’ best interests*
Market• People and firms act in their own best interests• Allow buyers/sellers to come together to exchange goods or services • Ex. U.S., Japan, Germany
Freely chosen activity between buyers and sellers of goods and services
Market Advantages:• Over time can adjust to change • Individual freedom• Little government interference• Decentralized decision making
Market Advantages: • Variety of goods and services • High consumer satisfaction• Freedom to chose career, spend their income how they wish, own private property, take risks and earn profits
Define circular flow of economic activity
Economic model that pictures income as flowing continuously between businesses and consumers
Market Disadvantages:• Doesn’t provide for basic needs of all members • Doesn’t provide enough services people highly value*
Market Disadvantages:• High degree of uncertainty for workers and business
Market Disadvantages: • Can fail if three conditions are not met 4. Reasonably competitive markets5. Resources able to move from one activity to another6. Consumer access to information to make wise choices 7. Government helps to ensure these*
Define mixed economy
System combining characteristics of more than one type of economy*
Mixed• Combines the basic elements of a pure market economy and a command economy
Section 2 Characteristics of the American Economy*
Learning Goal: Identify and explain the six major characteristics of a pure market economy?
I. The six characteristics of a pure market economy• Little or no government control• Freedom of enterprise• Freedom of choice• Private property• The profit incentive• Competition
Explain why a pure market economic system Requires little or no government control.
Limited Role of Government Adam Smith: • Described a system in whichgovernment had little to do with a nations economic activity
1. Limited Role of Government• Stated that individuals left on their own would work for their own self- interest • They would then be guided by an “invisible hand” to use resources efficiently and thus achieve the maximum good for society
Identify the term used to explain Smith’s version of the ideal economic system.
Economic system in which private individuals own the factors ofproduction and decide how to use them within legislated limits
The government lets people andbusinesses make their own economicdecisions w/o government constraints
Identify the other term used for pure capitalism.
Economic system in which thegovernment minimizes its interference with the economy
1. Limited Role of Government • Since the 1880’s, the role ofgovernment-federal, state, and local- has increased
Explain how the government’s role over the economy has increased since the 1880’s
Federal agencies regulate the quality of various foods and drugs, watch over the nation’s money, and banking system, inspect workplaces for hazardous conditions, and guard against damage to the environment
• The federal government also uses tax revenues to provide social programs such as Social Security and Medicare • State and local government have expanded their roles in such areas as education, job training, recreation, and care for the elderly.
Freedom of Enterprise• The American economy is also called a free enterprise system
Define free enterprise system
Economic system in which individuals own the factors of production and decide how to use them within legal limits; same as capitalism
Explain how the government restricts free enterprise.
Freedom of Enterprise• Zoning regulations, child-labor laws , hazardous waste disposal rules, and other regulations• All limit free-enterprise to protect you
Freedom of Choice• Buyers, not sellers, make the decisions about what should be produced
Profit Incentive • When a person invests time, know- how, money, and other capital resources in a business, the goal is to make a profit• The desire of profit incentive motivates entrepreneurs to establish new business and produce new kinds of goods and servicesw
Private Property• One of the most important characteristics of capitalism
Define private property
Whatever is owned by individuals rather than by government
Money left after all the costs ofproduction-wages, rents, interests, and taxes-have been paid
Define profit incentive
Desire to make a money that motivates people to produce and sell goods and services
Describe the rights of property.
• The rights of humans to riskinvestment, own and produce assets, learn new ways of producing, and enjoy the benefits if these choices result in profits
Competition • Encouraged by the lure of profits• Leads to an efficient use of resources • Forces businesses to keep their production costs as low as possible • For competition to exist, barriers to enter and exit from industries must be weak
Rivalry among producers or sellers ofsimilar goods and services to win more business
Section 3 The Goals of the Nation
Learning Goal:Identify the goals of free enterprise.
Economic Freedom• Goal: To allow each member of society to make choices
Which country has the highest degree of economic freedom?
United States of America
Identify the consequences of economic freedom.
If a business fails, the government won’t help out
Economic Efficiency• Wise use of available resources so that costs do not exceed benefits • We must always be watchful that the costs of our economic actions do not exceed the benefits
Economic Equity• The attempt to balance an economic policy so that everyone benefits faily
Economic Security• Security is provided through a number of government social programs
Economic Stability• Goal: To reduce the extreme ups and downs in the standard of living• The standard of living is measured by the average value of goods and services used by the average citizen during a given period of time
Define standard of living
The material well-being of an individual, 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
What is required to for a nation to achieve economic goals?
Explain the responsibilities associated with a well-functioning free enterprise system.
Individual responsibilities • Ability to support yourself and your family• Responsibility to use your education in a reasonable manner that helps you become a productive member of the free enterprise system
Individual responsibilities• Individuals have the responsibility of electing responsible government officials