The American Economic
System
Basic Economic Unit Part II
Types of Economic Systems
Traditional

Characteristics:



Little Change
Based on Custom
How answer the
economic questions?

How they always
have
Command

Characteristics




Government
controls means of
production
Little individual
influence
Communism &
Socialism
How answer the
economic questions?

Government does
Socialism

Gov. owns some factors of
production and distributes products
and wages
Communism

Socialism under the dictatorship of
the communist party
Market

Characteristics:



Private
individuals
control the
factors of
production
Individual
freedom
How questions
answered?

By businesses
and consumers
Mixed

Characteristics:


Some individual freedom some
government control
How are questions answered?

Individuals do but have some
government intervention
All economies are actually mixed.
What determines whether an
economy is considered market or
command depends on the level of

Government involvement.
Who developed the principles of a
market economy?

Adam Smith
What was the Wealth of Nations?

Smith’s book
that explained
the principles of
Capitalism
What did Smith mean by Laissez-faire
economics?


“To let alone”
Government
should stay out
of marketplace
except to ensure
competition
The Invisible Hand


Belief that
individuals on
their own would
work for own
self-interest
Would be guided
by “invisible
hand” to use
resources
efficiently
Characteristics of Market/Free
Enterprise System



Little or no government intervention
– governments role in econ. is to
ensure competition
Free Enterprise – Competition
with little gov. interference
Freedom of Choice – individuals
can choose what work to do and
what we buy
Characteristics Continued



Private Property – right to own and use
our property as we choose within
certain legal limits
Profit Incentive – the driving force of
capitalism, the ability to accumulate
wealth
Competition – the struggle between
buyers and sellers to get the best
products at lowest prices
What does the Circular Flow Model
illustrate?

How resources, goods and
services, and money flow in a
circular pattern
Market

The exchange of goods and
services between buyers and
sellers
Factor Market

Where productive resources
(the factors of production) are
bought and sold
Product Market

Market where goods and
services (finished products) are
offered for sale
What happens when less is exchanged
in the circular flow?

The economy shrinks,
productivity goes down
What happens when more is
exchanged?

Economy grows, productivity
increases
What is productivity?

The amount of output that can
be produced by a set amount of
resources in a given period of
time
Productivity

Goes up when can produce the
same amount of output in less time
Or

When can produce more output with
same amount of resources in same
time
Increasing Productivity



Specialization when people,
businesses or countries focus on
what they do best
Division of Labor breaking down
of a job into small parts
performed by different workers
Investing in Human Capital
spending to improve worker
skills
What do these practices create
between individuals, communities
and nations?

Economic Interdependence creates
dependence between people for
goods and services