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  1. 1. Chapter Introduction Section 1: Economic Systems Section 2: Evaluating Economic Performance Section 3: American Free Enterprise Visual Summary
  2. 2. Take a closer look at the way your high school is organized. Who makes the decisions on lesson plans? Who plans out events that take place during the year? Who makes financial decisions, and how? Are parents and voters involved in the educational system? Obtain information from your school district office or the library to create a chart that lists the rights and responsibilities of people in your school district to meet the needs of education. Read Chapter 2 to learn about the different economic systems that societies set up to meet their specific economic needs.
  3. 3. Every society has an economic system to allocate goods and services.
  4. 4. Section Preview In this section, you will learn about the different types of economic systems that govern WHAT goods and services to produce, HOW to produce them, and FOR WHOM to produce them.
  5. 5. Content Vocabulary • economic system • market economy • traditional • market economy • command economy • allocate • communism • capitalism • mixed economy Academic Vocabulary • stagnation • socialism • emphasizing
  6. 6. Are you familiar with the similarities and differences between a market economy and a command economy? A. Yes A 0% 0% 0% C C. Somewhat A. A B. B C. C B B. No
  7. 7. Economic Systems • All societies use an economic system to provide for needs and wants of their people. • Three major economic systems exist: – Traditional – Command – Market Comparing Economic Systems
  8. 8. Economic Systems (cont.) • Most economies combine elements of the three. Comparing Economic Systems
  9. 9. Traditional Economies Traditional societies use ritual, habit, or customs to answer the basic questions of WHAT, HOW, and FOR WHOM to produce.
  10. 10. Traditional Economies (cont.) • A traditional economy—use of scarce resources and economic activity is based on habit or custom.
  11. 11. Traditional Economies (cont.) • Advantages – Everyone knows which role to play. – Little uncertainty on what or how to produce. – Customs and traditions determine who is provided for.
  12. 12. Traditional Economies (cont.) • Disadvantages – Individuals generally not free to make decisions – New ideas discouraged, leading to stagnation and a lower standard of living – Strict rules defined by elders and ancestors
  13. 13. Which of the following societies operate under a traditional economy? A. Australian Aborigines B. Botswana 0% D A 0% A B C 0% D C D. All of the above A. B. C. 0% D. B C. Mbuti
  14. 14. Command Economies Command economies rely on a central authority to make most of the economic decisions.
  15. 15. Command Economies (cont.) • A central authority makes the major decisions in a command economy.
  16. 16. Command Economies (cont.) • Advantages – Can change direction drastically through emphasizing/allocation – Health and public services available to everyone at little or no cost
  17. 17. Command Economies (cont.) • Disadvantages – Basic wants and needs of consumers are ignored. – Economies tend to be unproductive, not producing a good product. – Large decision-making bureaucracy lacks flexibility.
  18. 18. Command Economies (cont.) – Severely limits private property rights – Individual freedom and initiative are limited.
  19. 19. Which is a disadvantage of a command economy? A. Large decision-making body needed 0% C B C. Can change from a rural society to an industrial nation in a few decades A. A B. B 0% C. C0% A B. Health and public services available to everyone
  20. 20. Market Economies In a market economy, consumers and businesses jointly answer the questions of WHAT, HOW, and FOR WHOM to produce.
  21. 21. Market Economies (cont.) • A market economy allows people to make decisions in their own best interest. • Buyers and sellers exchange goods and services in a market. • Market economies are based on capitalism. • Capitalism means that the factors of production are privately owned.
  22. 22. Market Economies (cont.) • Advantages – High degree of individual freedom – Adjusts gradually to change over time – Small degree of government interference – Decision making is decentralized – Large variety of goods and services – High degree of consumer satisfaction
  23. 23. Market Economies (cont.) • Disadvantages – Not everyone is provided for – May not provide enough of some basic goods and services – High degree of uncertainty for workers and employers
  24. 24. In the following areas, do you think government needs to increase or decrease its presence? A. National defense A C. Care for elderly and disabled B A. A B. B 0% 0% C. C 0% C B. Environmental protection
  25. 25. Mixed Economies Most economies in the world today feature some mix of traditional, command, and market economies.
  26. 26. Mixed Economies (cont.) • Most economies in the real world are mixed economies. • When political systems are considered with economic systems, the picture gets more complicated. • An example is socialism and its extreme, communism. The Spectrum of Mixed Economies
  27. 27. Mixed Economies (cont.) • The type of political system in a mixed economy is less important than the way basic economic decisions are made. The Spectrum of Mixed Economies
  28. 28. Mixed Economies (cont.) • Advantages of a mixed economy – Provides assistance for some people who might otherwise be left out – In a democratic society, voters use electoral power to affect WHAT, HOW, and FOR WHOM decisions. – In a socialist society, FOR WHOM is addressed more directly by government.
  29. 29. Mixed Economies (cont.) • Disadvantages – More services mean higher costs for citizens overall. – In socialist countries, availability of services may be limited or quality deteriorates over time.
  30. 30. What is the main advantage of a mixed economy? A. Ownership and control by government B A C. Provides assistance to people otherwise left out A. A B. B 0% 0% C. C 0% C B. More services are provided at a higher cost to citizens.
  31. 31. Section Preview In this section, you will learn how economic freedom, economic security, and economic equity are related to the level of satisfaction people have with their economic systems.
  32. 32. Content Vocabulary • minimum wage • Social Security • inflation • fixed income Academic Vocabulary • adverse • accommodate
  33. 33. What happens when our economic system fails to achieve our goals? A. Societies demand laws to modify system until needs are met. 0% 0% D A B C 0% D C D. Inflation occurs. A C. A command society results. A. B. C. 0% D. B B. The government collapses.
  34. 34. Economic and Social Goals Americans share several major economic and social goals.
  35. 35. Economic and Social Goals (cont.) • In the United States, there are seven major economic and social goals: – Economic freedom – Economic equity • The minimum wage was established on a national level. • Many states established lemon laws.
  36. 36. Economic and Social Goals (cont.) – Economic security • Social Security was established for disabled or retired beneficiaries. – Full employment
  37. 37. Economic and Social Goals (cont.) – Price stability • Inflation makes paying bills difficult for individuals on a fixed income. • High rates of inflation discourage business activity. – Economic growth
  38. 38. Economic and Social Goals (cont.) • As our society evolves, more goals may become important to us.
  39. 39. Do you think the current list of seven goals is enough? A. Yes B. No A. A B. B 0% B A 0%
  40. 40. Resolving Trade-Offs Among Goals Conflicts among goals can be solved by comparing the cost of a goal to its benefit.
  41. 41. Resolving Trade-Offs Among Goals • Individuals have different ideas on how to reach a goal or on the goal itself. • Our economic policies have opportunity costs and trade-offs. (cont.)
  42. 42. Resolving Trade-Offs Among Goals (cont.) • In many cases, trade-offs among goals are resolved when people compare their estimate of the costs to their estimate of the benefits and then vote for candidates accordingly. • The U.S. economy is flexible enough to allow choices, accommodate compromises, and still satisfy the majority of Americans.
  43. 43. Do you support the preservation of endangered species such as the California Channel Islands fox? A. Completely A 0% 0% C C. Not at all A. A B. B 0% C. C B B. Somewhat
  44. 44. Section Preview In this section, you will learn how under capitalism the basic economic decisions of WHAT, HOW, and FOR WHOM to produce are made through the free interaction of individuals looking out for their own best interests.
  45. 45. Content Vocabulary • free enterprise • profit • voluntary exchange • profit motive • competition • private property • consumer rights sovereignty Academic Vocabulary • incentive • catalyst • regulator • mixed or modified free enterprise economy
  46. 46. Can you name any countries that operate a free enterprise economy? A. Yes B. No A. A B. B 0% B A 0%
  47. 47. American Free Enterprise • In many parts of the world, capitalism has become the economic choice. • Capitalism allows private citizens to own and use the factors of production to generate profits. • The U.S. economy is based on free enterprise. Characteristics of Free Enterprise Capitalism
  48. 48. American Free Enterprise (cont.) • Capitalism and free enterprise are often used interchangeably, although meanings are different. – Capitalism stands for the private ownership of resources. – Free enterprise is the unhindered use of privately owned resources to earn profits. Characteristics of Free Enterprise Capitalism
  49. 49. Characteristics of Free Enterprise Capitalism The American economy incorporates the main characteristics of a free enterprise economy.
  50. 50. Characteristics of Free Enterprise Capitalism (cont.) • There are five major characteristics of a free enterprise economy: – Economic freedom – Voluntary exchange Characteristics of Free Enterprise Capitalism
  51. 51. Characteristics of Free Enterprise Capitalism (cont.) – Private property rights • Private property gives individuals incentive to work, save, and invest. – Profit motive • People are free to take risks to earn a profit. – Competition Characteristics of Free Enterprise Capitalism
  52. 52. What is largely responsible for the growth of a free enterprise system? A. Competition B. Profit motive 0% C A 0% A. A B. B 0% C. C B C. Voluntary exchange
  53. 53. The Role of the Entrepreneur Entrepreneurs are the driving force of the free enterprise system.
  54. 54. The Role of the Entrepreneur (cont.) • Entrepreneurs – Organize and manage land, capital, and labor to gain a profit – Are the people who start up new businesses – Want to “be their own boss” – Are willing to take risks
  55. 55. The Role of the Entrepreneur (cont.) • Entrepreneurs are both the spark plug and the catalyst of the free enterprise economy. • Their search for profits leads to a chain of events that brings – New products – Greater competition
  56. 56. The Role of the Entrepreneur (cont.) – More production – Higher quality – Lower prices for consumers Profiles in Economics: Tony Hawk
  57. 57. Why might an entrepreneur fail? A. Not enough capital B. Poor product or service 0% D A 0% C D. All of the above A. A B. B C. C 0% 0% D. D B C. Not aware of competition
  58. 58. The Role of the Consumer The economy in the United States adapts to consumers’ wants.
  59. 59. The Role of the Consumer (cont.) • Consumers ultimately determine which products are produced. • If consumers like a new product, producers are rewarded with profits. • Consumers not purchasing a product can cause a firm to go out of business.
  60. 60. The Role of the Consumer (cont.) • The phrase “the customer is always right” recognizes consumer sovereignty. • Consumers are always looking for new ideas and products.
  61. 61. Do you believe that “the customer is always right”? A. Always B. Sometimes 0% C A 0% A. A B. B 0% C. C B C. Never
  62. 62. The Role of the Government The economic role of the U.S. government is decided by its citizens.
  63. 63. The Role of the Government (cont.) • The role of government stems from the desires, goals, and aspirations of its citizens.
  64. 64. The Role of the Government (cont.) • Government has become – A protector – Provider – Regulator – Consumer
  65. 65. The Role of the Government (cont.) • In general, the role of government in the economy is justified whenever the benefits outweigh the costs. • An unintended consequence of government’s role is the emergence of the mixed or modified free enterprise economy.
  66. 66. The Role of the Government (cont.) • Some people prefer to have no government involvement in the economy— which is not possible. • Services like a national defense and a system of laws and justice cannot be supplied by the private sector alone.
  67. 67. Do you agree or disagree with the statement that the role of government in the economy is justified whenever the benefits outweigh the costs? A. Always 0% 0% C 0% B C. Never A. A B. B C. C A B. Sometimes
  68. 68. Economic Systems Most countries have a mix of three different types of economic systems.
  69. 69. Economic and Social Goals In the United States, we share several economic and social goals.
  70. 70. Free Enterprise The U.S. economic system is based on the free enterprise system and is characterized by competition and private ownership of resources.
  71. 71. Tony Hawk (1968– ) • professional athlete at age 14 and best skateboarder in the world by age 16 • owner of a successful business empire based on resurgence of skateboarding and name recognition
  72. 72. economic system organized way in which a society provides for the wants and needs of its people
  73. 73. traditional economy economic system in which the allocation of scarce resources and other economic activities are based on ritual, habit, or custom
  74. 74. command economy economic system characterized with a central authority that makes most of the major economic decisions
  75. 75. market economy economic system in which supply, demand, and the price system help people make decisions and allocate resources
  76. 76. market meeting place or mechanism that allows buyers and sellers to come together
  77. 77. capitalism economic system in which private citizens own and use the factors of production in order to generate profits
  78. 78. mixed economy economic system that has some combination of traditional, command, and market economies
  79. 79. socialism political and economic system in which the government owns and controls some factors of production
  80. 80. communism economic and political system in which all factors of production are collectively owned and controlled by the state
  81. 81. stagnation lack of movement
  82. 82. allocate to assign
  83. 83. emphasizing stressing
  84. 84. minimum wage lowest wage that can be paid to most workers
  85. 85. Social Security federal program of disability and retirement benefits that covers most working people
  86. 86. inflation rise in the general level of prices
  87. 87. fixed income income that does not increase even though prices go up
  88. 88. adverse unfavorable or harmful
  89. 89. accommodate to allow for
  90. 90. free enterprise capitalistic economy in which competition is allowed to flourish with a minimum of government interference
  91. 91. voluntary exchange act of buyers and sellers freely and willingly engaging in market transactions
  92. 92. private property rights fundamental feature of capitalism that allows individuals to own and control their possessions as they wish
  93. 93. profit extent to which persons or organizations are better off financially at the end of a period than they were at the beginning
  94. 94. profit motive incentive that encourages people and organizations to improve their financial and material well-being
  95. 95. competition the struggle among sellers to attract consumers
  96. 96. consumer sovereignty role of consumer as ruler of the market when determining the types of goods and services produced
  97. 97. mixed or modified free enterprise economy economy where people carry on their economic affairs freely but are subject to some government intervention and regulation
  98. 98. incentive something that motivates
  99. 99. catalyst something that stimulates activity among people or forces
  100. 100. regulator someone or something that controls activities
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