*Ch. 2 explains or describes how economic systems answer basic questions about production and distribution of goods and services, how economic systems differ; and what constitutes the major characteristics of the United States market economy.
* The way that each individual lives in a society is based on how the country handles problems and questions involving their economy. These are issues dealing with inflation, consumer needs, and so forth.
* When it comes to an economy, there are three basic economic questions that each must answer.
*Use guns vs. butter example.. *Who will get the job done? * The way that a country handles these questions is based on their economic system. An economic system is basically the decision making that is done to answer these questions *Who receives the new goods?
*A traditional economy is an economy that answers the three questions based on their social customs and how the society has dealt with these questions in the past. A country's customs can differ greatly to that of a neighboring country so traditional economies vary from one another.
*A command economy is an economy where these questions are all answered by the government. Rather than giving indviduals the chance to decide what they want or need, the government decides these questions for the country. This type of economy is difficult for the individual because it is impossible for the government to know exactly what is best for each and every citizen.
*command economies don't help with their workers' motivation because everyone is given the same amount of goods and the same standard of living. A hard working citizen would not be given a chance to benefit from their extra work because they cannot increase their standard of living any greater than it currently is and they will make just as much as a person who exerts little or no effort.
*A market economy is the type of economy that the United States has and these questions are answered in the marketplace by the interaction of buyers and sellers. For example, the question of what to produce may be based on what trend is popular right now. The producer would create a product that they think would sell well to the public in hopes to make a profit. The question of how to produce is usually based on the producer's choice. They might decide to produce a product with more workers or they might decide to produce it more with machines and computers to save on labor costs. The question involving for whom to produce is based on the buyer who decides what they want or need and what price they are willing to pay for it.
* Education, healthcare
* A market economy is great for motivating workers to work harder because they are only paid based on what they do. A worker can increase their income or profit by working harder and this chance to profit motivates them.
* A mixed economy is an economic system that answers the three questions both in the marketplace and in the government. Although the United States government plays a role in our economy, a mixed economy usually involves producers working closer with the government than they do in the United States so the US economic system is still a market economy.
*Section 2 explains or describes the major components of a market economic system and how they apply to the American free enterprise system.
Section 3 explains or describes the major goals of the United States economy and the benefits and responsibilities of individuals in a free enterprise system.
2.economic system and the american economy
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*
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
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*
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*
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 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
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
• 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
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
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