3/15/15 Economic Systems and
the American Economy
Economic Systems
Chapter 2
Chapter 2, Section 1
Economic Systems
Traditional Economy
!  Economic System: The way that a society uses its
!  Traditional Economy: system in which economic decisions are based on
!  Each economic system address THREE questions:
!  Decisions are made according to historical patterns.
resources to satisfy the wants and needs of the people
!  WHAT should be produced?
!  HOW should it be produced?
!  FOR WHOM should it be produced?
!  FOUR economic systems:
!
!
!
!
Traditional economy
Command economy
Market economy
Mixed economy
customs and beliefs that have been handed down generation to
generation.
!  Your job is learned from your parents.
!  Advantages:
!  Family and community ties are strong.
!  Roles are clearly defined.
!  Disadvantages:
!  Change is discouraged, so methods of production are often inefficient.
!  Choice of consumer goods is limited.
!  Standard of living does not increase over time or generation to generation.
!  Examples: tribal communities such as the Inuit of North American or the
Aborigines of Australia
Command Economy
Market Economy
!  Command Economy: System in which the governments controls the
!  Market Economy: system in which individuals own the factors of
!  Economic decisions are made by the leader of the country, a small group
!  A market economy is a capitalist system.
factors of production and makes all decisions about their use.
of leaders or a group of central planners.
!  Workers may not get to choose their own job.
!  Workers are paid according to what the central government decides.
!  Disadvantages:
!  No incentive to work hard or show inventiveness as you cannot get ahead.
!  Without inventiveness, production is inefficient.
!  Limited consumer choices
!  This is the type of economy in communist (and some socialist)
countries.
production and make decisions about their use
!  The role of government is limited – allowing individuals to make the
economic decisions (three questions).
!  Advantages:
!  Freedom – free to choose your job and how to spend your money, free to own
property, free to start a business and earn profits
!  Efficient production since individuals are rewarded for ingenuity and hard work
!  Many consumer choices
!  Disadvantages:
!  Individuals must sell their labor to survive – individuals who cannot or will not
work cannot survive in this economy.
!  Example: North Korea, the former Soviet Union
1 3/15/15 Market Economy
(continued)
!  Market Economy: system in which individuals own
the factors of production and make decisions about
their use
Market Economy
(continued)
!  Circular Flow of Income and Output: economic
model that pictures income as flowing continuously
between businesses and consumers
!  Market: The process of freely exchanging goods
and services between buyers and sellers.
!  This exchange is driven by prices.
!  This is the opposite of a command economy.
!  Example: There are no pure market economies.
The US is primarily a market economy but not
purely.
Mixed Economy
!  Mixed Economy: system combining characteristics of more than
one type of economy.
!  Most mixed economies are a combination of command and
market economies.
!  Private ownership of property and individual decision making are
combined with government intervention and regulation.
!  Examples of government involvement in mixed economies:
Characteristics of the
American Economy
Chapter 2, Section 2
!  Government consumes and produces goods (military, roads, schools)
!  Government may own some factors of production (such as natural
resources)
!  Transfer programs – taking taxes from some citizens and giving the
money to the poor, elderly or disabled (welfare, medicaid)
!  Example: The US is a mixed economy – it is a combination of
market and command economies
The Limited Role of Government in
the American Economy
!  America is capitalist – an economic system in which private individuals
own the factors of production.
!  Laissez-faire: a French term “let the people do as they choose” It refers
to a pure capitalist system.
!  In America, individuals own the factors of production but use them
within certain legislated limits.
!  The role of the government in our economy is limited but has grown over
Characteristics of the
American Economy
!  Limited Role of Government
!  Freedom of Enterprise – Individuals are free to own the factors of
production and decide how to use them within legal limits.
!  Free-enterprise system = capitalism = market economy
!  Freedom of Choice – Buyers decide what will be produced based
on buying or not buying a certain product.
the last 100 years.
!  Federal agencies regulate the quality of food and drugs
!  Federal government oversees the nation’s banking system
!  Government inspects workplaces for hazardous conditions
!  Government guards against damage to the environment
!  Government uses tax revenues to provide social programs to the elderly, poor
!  Profit Incentive – The desire to make a profit that motivates
!
!  Private Property – Property can be owned by individuals or
and disabled
State and local governments regulate education
people to produce goods and services.
!  Profit: Business revenues minus costs
!  Competition – rivalry among producers of similar goods and
services to win more business.
groups of individuals rather than by the government.
2 3/15/15 Remember…
Free-Enterprise System = Capitalism = Market Economy
Goals of a Nation
Chapter 2, Section 3
Goals of Free-Enterprise
!  Freedom – Individuals have choices: what to buy, what to
produce, what to own, what to do for a living, how much to work.
!  With freedom come costs – if you start a business that fails, the
government usually won’t help you.
!  Economic Efficiency – wise use of scarce resources to obtain the
greatest possible benefit
!  If we waste resources, we won’t have as many goods.
!  Economic Equity – the attempt to balance economic policy so
that everyone benefits fairly.
!  Equal pay for equal work, fairness in hiring
!  The US is a technically a mixed economy but it is
much more market economy and less command
economy
Goals of Free-Enterprise
(continued)…
!  Economic Stability – reducing extreme ups and
down in our standard of living: material well-being
of a person, 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.
!  Economic Security – protection against risks beyond our control
(accident at work, bank failure, natural disasters, poverty in old
age)
Rights and Responsibilities
in Free Enterprise
Rights
Responsibilities
!  Enter any profession or
!  Support yourself and your
!  Work very little or even be
!  Use you education to
!  Buy whatever products and
!  Elect responsible
business you choose
a “workaholic”
brands you choose
family
become a productive
member of society
Socialism and
Capitalism
Chapter 2, Section 4
government officials – this
means having knowledge of
government policies and
being able to analyze those
policies
3 3/15/15 Socialism
Socialism
!  Pure Command Socialism: a system in which the
government owns the major factors of production
and attempts to manage output and the
distribution of goods
!  There are few examples of this: North Korea and
Cuba and the former Soviet Union
!  Marxian View of Socialism: Marx’s view is that capitalists
(owners of businesses) exploit workers. He believed that
since the workers made the goods, the workers should get the
profits, not the owners.
!  Marx believed that capitalism would make the workers poor
and the workers would rise up and overthrow capitalism.
Then the government would own the factors of production,
creating socialism.
!  Marx also believed that socialism would evolve into
communism: an idealized society where there is no
government; “society” not individuals would own the factors of
production.
!  This exists nowhere today
!  In reality, communist countries have very powerful central
governments, not “no government”.
Socialism
In the
20th
Criticisms of Socialism
century, two types of socialism developed:
!  Democratic Socialism: system that works within a
constitutional framework of a nation to elect socialists
to office; the government usually controls only some
areas of the economy.
!  Many countries have this system.
!  Government interference in the economy
!  Limited personal freedoms
!  Low production efficiency
!  Slow rate of economic growth
!  Authoritarian Socialism: system that supports
revolution as a means to overthrow capitalism and bring
about socialist goals. The entire economy is controlled
by a central government – also called communism.
!  Examples: North Korea, Cuba, the former Soviet Union.
Capitalism
Benefits
!  Freedom
!  Better efficiency
!  Higher rates of economic
growth
Criticisms
!  Not all people have the
same income level
!  Government does not
provide enough services for
people
!  Planning is shared by
individuals, businesses and
government
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