Bell Ringer

Do all countries have the same
economic needs/goals?
Economic Systems and the
American Economy
Chapter 2
Economic Systems

Your goals in life are very different
from a teenager who lives in North
Korea


The reason for this is because you live in a
different economic system
Economic System: the way of
determining how to use resources to
satisfy people’s wants and needs
Economic Systems

When deciding how to use their resources
every economic system must answer
three questions:
What should be produced?
1.


2.
How should it be produced?


3.
I-Pods versus Macbooks
Guns versus Butter
Skilled or unskilled labor
Quality versus Quantity
For whom should it be produced?


Lottery, first-come-first-serve, sharing equally,
military force, or individual choice
Which of these is the American way?
Economic Systems

There are four types of economic
systems:
Traditional
 Command (Controlled, Communist)
 Market (Capitalist)
 Mixed


Can you guess which system is
America’s system?

NOTE: No “pure” system exists
Economic Systems

In a traditional economy the answer to the
three questions is “the way it has always been
done”





Economic decisions are based on traditions,
customs, and religious beliefs
In this system, you would be the same profession
as your father (women are typically housewives)
and do it the same way he did
Advantage: you know what is expected of you;
family ties/values are strong
Disadvantage: change is discouraged/punished,
methods of production are inefficient, choice is
rare
Where to find: Inuit tribes, Aborigines in Australia
Economic Systems

In a command economy the individual has
little influence over the three questions



The Government leaders control the factors of
production, and therefore the decisions made
The government is often one person or a
small group (a dictatorship)
You would be paid based on what the
government wanted to pay you, and in some
cases you would do what job they wanted
you to do and what schooling you received
Economic Systems

There are only a few countries in the
world that have a controlled economy
today including China, North Korea,
and Cuba
Advantage: Speed in rerouting resources
(switching from civilian to war goods)
 Disadvantage: lack of incentive to work or
show initiative, lack of consumer choices

Economic Systems

A pure market economy allows
individuals to make decisions for their
selves and their families
Government does not interfere with
economic decisions
 Individuals own the factors of production
and therefore answer the three questions
themselves

 Prices
are the guiding force behind how
individuals make these decisions
Economic Systems

A market is a voluntary exchange of goods and
resources between a buyer and seller


This occurs anywhere in the world when a
government buys oil, a parent hires a babysitter,
you buy an I-phone, etc.
As prices change, they act as signals to others in
the system


When the price of gas goes up, it signals that there is a
shortage so people should buy less, when it goes down,
it means that there is enough for people to buy more
The freedom of prices allows the economy to
regulate itself over time (doesn’t occur
immediately)
Homework
Finish Reading Chapter 2, Start
Reading Chapter 19
 Continue working on Unit 1 Study
Guide
 Begin work on Research Paper

Bell Ringer

Is the market economic system better
than the command economic system?
Why or why not?
Economic Systems


Economists use
the circular flow
of activity model
to show how a
market system
works
Economic
decisions are
scattered among
all participants in
the economy
Consumer Spending on Goods
and Services
Production
of Goods/Services
Sale or Rent
of Resources
Payments for Use of Resources
(Wages, Interest, Rents, Profits
Economic Systems

Advantages of a market economy:



freedoms—choose a career, spend or not
spend, own private property, take risks for
profit
competition creates more products at cheaper
prices, efficient production of goods
Disadvantages of a market economy:


Old, young, and disabled would have to rely
on family or other individuals for care
Difficult to shift from civilian goods to military
goods in a hurry
Economic Systems

Mixed Economy: combines elements from
command and market economies


Most countries in the world have a mixed
economy
The United States is a mixed economy



Individuals produce and purchase goods based on
wants, needs, and price
The government makes laws to protect private property
and individuals from bad business practices
Individual goals are based around what type of
system you live in

Government involvement versus individual control
determines a society’s economic system
Characteristics of the
American Economy

A pure market system has 6
characteristics:
1.
2.
3.
4.
5.
6.

Little or no government involvement
Freedom of enterprise
Freedom of choice
Private property
The profit incentive
Competition
All of these characteristics are present in
the American economy
Characteristics of the
American Economy

Adam Smith, in his book An Inquiry into the
Nature and Causes of the Wealth of Nations,
was the first to publish the idea that
governments should stay out of the economy





If individuals were left on their own they would
work for their own self-interest
By working for their own self-interest people guide
the “invisible hand” of using resources wisely to get
the most out of them
This is called capitalism
Pure capitalism is called laissez-faire meaning “let
[people] do [as they choose]”
American capitalism is people owning the factors of
production and using them within legislated limits
Characteristics of the
American Economy

How is the government involved in the
economy today?
Regulate quality of food and drugs
 Regulate banking and money
 Inspect hazardous working conditions
 Protect the environment
 Issue taxes for Social Security, etc.
 SEC, ICC, FTC and other oversight
organizations

Characteristics of the
American Economy

Another term for the American
economy is free-enterprise system
meaning individuals own/control the
factors of production
If you go into business for yourself, you
may become rich, or lose everything
 The government does restrict where you
can open a business, who you can hire,
how you can affect the environment, etc.

Characteristics of the
American Economy

Americans typically get to choose what
they buy (freedom of choice)


When we don’t buy something, the company
stops producing it
The government has begun
intervening here too—
warnings on products, age
limits for products, and
setting prices when only a
few companies produce the
product
Characteristics of the
American Economy

Profit incentive is the willingness to
produce goods and services in order to
make money



Profit is all the money left over after a
business’ bills have been paid
Failing is a risk that the business owner takes
Americans have the right to own private
property

We choose what we want to do with the
property (within legal means)
Characteristics of the
American Economy

Competition is necessary for the
American system
How does competition lead to efficient use
of resources?
 Barriers of entrance and exit must be
weak

 Barriers
include: taxes, licenses, laws, etc.
 An example: In order to be a teacher, you
must have a teaching license
The Goals of the Nation

There are six economic goals of the
United States:
1.
2.
3.
4.
5.
6.
Economic
Economic
Economic
Economic
Economic
Economic
freedom
efficiency
equity
security
stability
growth
The Goals of the Nation

Economic freedom allows Americans to
start businesses, own property, and
make their own decisions

What economic choices will you be free to
make upon graduation?
With these decisions
come
the possibility of
failure—
typically the
government doesn’t
help failures
The Goals of the Nation

Economic efficiency requires us to use
our resources responsibly
Example: the cost of gas over the summer
averaged more than $4/gallon—this was a
sign to the Americans that they needed to
reduce consumption of gas or risk using it
all up
 When we reduced our consumption, the
price fell down to $1.50-$2 per gallon

The Goals of the Nation

Economic equity is desired to make
sure all Americans have equal
opportunity to be successful (wealthy)
This is why there are labor laws for equal
pay and laws for equal access to education
despite skin color
 This is not to say that the government is
responsible for making sure you make the
same amount of money as your neighbor
when you work at McDonalds and they
work for Lockheed Martin

The Goals of the Nation

Economic security is provided by the
government with regards to issues that
are beyond our control
Natural disasters, accidents, old age, bank
failures
 The government helps people by paying
Social Security, Unemployment, or through
FEMA and the FDIC

The Goals of the Nation

America hopes to avoid extreme ups
and downs in the standard of living
Standard of living: the material well being
of an individual, group or nation measured
by how well their necessities and luxuries
are satisfied
 The US has one of the highest standards
of living in the world

The Goals of the Nation

Economic growth is a goal of all nations


A country must be able to increase the
amount of goods and services produced over
time to keep up with expanding populations
A trade-off must occur when one of the
goals is competing for resources from
another goal

Politicians must understand the goals and
how to most appropriately use resources to
get the most out of them
The Goals of the Nation

There are many rights that come with
being in a free-enterprise system
Enter almost any profession you want
 Open up any business
 Work a little or work a lot


To have these freedoms, there are
certain responsibilities
Must support yourself/family
 Must elect responsible government officials

Homework
P. 45 #1-2
 P. 50 #1-3
 Continue working on your Factors of
Production Project
