Chapter 5
The U.S. Economic System
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Section 5.1
Comparing Economics Systems

Objectives
 Explain why economic systems develop;
 Distinguish between traditional, command,
market, and mixed economies; and
 Describe goals and characteristics of the
U.S. economy.
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Resources:
Goods – items we buy (shoes, pizza)
Services – provided by others (transportation,
haircuts)
Needs – things we need to live (food, basic clothing,
shelter)
Wants – not necessary, but desired (computer, latest
fashions)
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Economics – is the social science that examines how
society uses scarce resources to produce and distribute
goods and services that satisfy people’s wants and
needs
Economist – specialist in the field of economics
Systems that affect us and we affect them:
Macroeconomics – economics on a national
and global scale, decisions made by government
Microeconomics – economics decisions made
by individuals and businesses.
Economic System – is the way a society uses resources
to satisfy its people’s needs and wants.
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Consumer Resources
Money
Time
Skills
Personal Energy
Tools
Community Agencies
Society Resources
Land
Natural Resources
Power
Communication
Transportation Resources
Factories
Workers
Money from the government
Trade with other nations
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2.1 Scarcity – an economic principle stating that because of
limited resources, an economic system can not possibly
produce all the goods and services that people want;
therefore, choices must be made about how limited resources
will be used. (Vaccines, food, gas). Economic systems
develop because of scarcity.
2.2 Opportunity cost – the value of the best alternative you
give up when you decide to use resources one way rather than
another. (Land)
3 Basic Questions because of Limited Resources:
1. What goods or services will be produced?
2. How will these be produced?
3. Who will benefit or share them?
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Types of economic systems in the world:
1. Traditional Economy – an economic system in which
decisions about what is produced, how, and for whom is
based on traditional customs and beliefs of the society
(Subsistence economy)
•Very few
•Limited access to technology
2. Command Economy – decisions about what to
produce, how and for who are decided by a central
government. (Controlled economy)
Strict
Everything government decides:
o Jobs
o Quantity
o Cost
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3. Market Economy – decided by individual’s self-interest and
private companies acting in their own interest (capital system)
Market – mechanism that brings potential buyers and
sellers together to exchange goods and services.
4. Mixed Economy – combinations of command and market
economies.
•Free market with some government control
•Most of today’s world’s economics
Examples:
•People’s Republic of China – more government control
•U.S. – more individual control
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U.S. Economic System:
Goals
Growth
Efficiency
Stability
Justice
Security
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Characteristics of the American economic system
Private Property – land, business,
goods
Freedom of Choice – you spend own
money, which decides product success
and failure.
Freedom of Enterprise – (Private or
Free) individuals are free to own and
control business enterprises
o Free enterprise
Limited Government control –
individual allowed competing for profit
with a minimum of government
regulations.
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Section 5.2
Producers and Consumers

Objectives
 Describe factors that motivate and
influence production;
 Explain forces that determine prices in a
free market; and
 Discuss the roles of producers and
consumers in the U.S. economy.
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Producing Goods and Services
Producers are motivated by money
Profit – earnings after all costs of production have been
paid
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Factors of Productions
Land – natural resources can come from land (fish,
crops, animals, trees, mineral deposits)
Labor – the work that people do to produce goods
and services (teachers, construction workers, airline
pilots, artists)
Capital – refers to machines and technology used in
the production of goods and services (factories,
farming equipment, roads)
Entrepreneurship – U.S. encourages owning
businesses, causing new products and services.
Technology – applied science (internet)
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Productivity – a measure of the efficiency w/ which
goods and service can be produced
•Technology has improved productivity
Specialization – people focus on producing a particular
good or service that they are able to do well
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Business Organizations
3 Types
Individual – owned and controlled by one
person called a proprietor
-Great risk, because of sole ownership, but
collects all profits
Partnership – owned and controlled by two or
more people
-Share all profits & risks
Corporation – an organization that is owned by
many people, but treated by law as a single entity
separate from its owners
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Shareholders – owners of a corporation, they purchase
shares of stocks, which are units of ownership in the
company
-Company does well, then gain money
-Company does poor, then lose money
-Cannot lose more money than they invested
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Prices in a Free Market
Demand – the quantity of a particular good or service that
consumers are willing and able to buy at a given price
Law of Demand – when a price goes down, then
demand generally goes up; when prices go up,
demand generally goes down
•Consumers usually purchase more at lower
prices.
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Supply – quantity of a particular product that producers
are able and willing to make available for sale
Law of Supply – when prices go up, then
supply generally goes up; when prices go down
then generally supplies goes down
Interaction of Demand and Supply – large
supply may need to lower price due to many
being in stock
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Surplus – excess quantity
Example:
•(Game System)
• Demand exceeds supply, and then
prices go up. Raising prices cause
demand to decrease causing a
surplus of supply.
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Equilibrium Price – when there is a price at which
demand will equal supply
Production Cost
Cost of producing a good or service
Cost can cause a ripple effect
Workers skills cause salaries to increase.
(COMPETITION)
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Labor Unions – Organization that represents workers
for the purpose of bringing about better pay and work
conditions
Collective Bargaining – Unions and employers
negotiate an employment contract that addresses issues
such as pay, benefits, working hours, working
conditions, and job security
Competition – rivalry between two or more
businesses that offer similar products or services
Lower prices
Better Service
More Features
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Consumers in the Market Place
Consumers have a major impact
Consumer Sovereignty – controlling influence of
consumers.
Boycott – organized refusal to purchase particular goods or
services
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Section 5.3
Government’s Roles

Objectives
Give examples of public goods and services;
 Describe government programs for
redistributing income;
 Explain why the government regulates
economic activity; and
 Identify two ways in which the government can
stabilize the economy.

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Levels of Government:
1. Federal – national level – matters that affect
the country as a whole
2. State – rights and powers not granted to the
federal government
3. Local – counties, townships, cities, towns,
etc…
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Public Goods and Services:
Examples:
National defense
Police and fire protection
Court and correctional institutions
Public parks
Streets, highways, bridge construction
and maintenance
Public education
Public transportation
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Redistributing Income
•Fund programs that assist people in need
•Redistribute collection of taxes from income
Social Security – an insurance program that is
sponsored by the federal government and pays
benefits to qualified people
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Social Security Benefits
Retirement Benefits – older retired people who
have paid into the system
Survivors’ Benefits – insured worker dies,
surviving family receive paid benefits to
replace lost income
Disability Benefits – develop physical or mental
conditions that doesn’t allow them to
work
Medicare – a program that pays some of the costs of
medical and hospital care for people who are 65
and older and disabled people under age 65
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Public Assistance Programs – provide aid to
individuals based on need, regardless of whether
they have paid taxes into the program
Examples:
Temporary Assistance to Needy Families (TANF)
Supplemental Security Income (SSI)
Food Stamps
Supplemental Food Programs for Women, Infants and
Children (WIC)
National School Lunch and School Breakfast Program
Food Distribution Program
Medicaid
State Children’s Health Insurance Program
Housing Programs
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Regulating Economic Activities – preventing
economic activities from causing harmful side
effects
•Protecting the Environment – pollution
of water and air (Environmental Protection
Agency)
•Protecting Consumers – removing unsafe
products
•Protecting Workers – child labor laws,
safe working conditions, wages
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Promoting Competition – good for consumers and for
the economy as a whole, but business will have
more profit if there was a lack of competition
Monopoly – (Trust) single company controls the supply
of a good or service for which there is not a close
substitute
•Competitions are to risky due to high costs
•Sometimes using unfair methods
Antitrust Laws – designed to regulate unfair business
practices that reduce competition
•The Federal Trade Commission, the Antitrust
Division of the Department of Justice, and
state agencies enforces this law
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Ensuring Economic Stability
•Instability causes the consumer and
businesses to suffer
•Causes unemployment
•Prices climb steeply and drop sharply
Government uses two basic approaches to maintain
economic stability:
Fiscal Policy – adjusting its policies on
taxing and spending
Monetary Policy – regulating interest rates and
the money supply
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Section 5.4
Principles of Taxation

Objectives
 Explain the purposes of taxation;
 Describe taxes paid by U.S. consumers;
 Explain principles of tax fairness; and
 Identify major government spending
categories.
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Tax – required payment to a local, state, or national
government
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Purposes of Taxation
• To fund public goods and services
Revenue – money collected or received by a
government for public use
•
To influence behavior
• Raise taxes to discourage negative sales
• Lower taxes to promote positive sales
•
To stabilize the economy
• Raise and lower taxes to stabilize cycles
•
To redistribute income
• Increase taxes for the wealthy and
spending it on programs to help the needy
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The Taxes People Pay
•Income Tax – collected from a job, interest on
saving accounts, other sources, etc…
•Collected by Internal Revenue Service (IRS)
•Some state or local governments may collect
more
•Leading source for federal government
•Social Security Tax – collected for the Social
Security program
•Collected by the Federal Insurance
Contributions Act (FICA)
•Employers and Employees pay equal
amounts, but self-employed people pay full
amount
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•Sales Tax – collected on the value of goods and
services
•Leading source for state government
•Food and drugs are either not taxed or taxed
at a lower rate
•Excise Tax – collected on the manufacture or sale
of certain goods and services
•Usually included in price
•Motor fuel, alcohol, tobacco, firearms, air
transportation, and telephone services
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•Property Tax – collected based on the value of
land and buildings owned
•Main source of revenue for local
governments
•Schools are funded largely by local
property taxes
•Estate Tax – collected on the value of a person’s
property after his or her death
•Gift Tax – collected on someone who
gives a gift exceeding a certain dollar
value
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•Business or License Taxes – collected from people
who have license fees to drive a car, own certain
pets, hunt and fish
•License fees also paid by doctors, lawyers,
electricians, and teachers in order to work in a
particular state.
•Help pay for record keeping cost
•Customs Duties and Tariffs – placed on goods
imported from other countries
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Taxes and Fairness
Two Principles
•Benefit Principle – if you use a public service,
then you should pay for it
•Ability-to-Pay Principle – people who can
afford to pay more should pay more taxes
Tax Rates – is the percentage that is charged in tax
Flat Tax – rate is the same for everyone who pays the tax
Graduated Tax – different rates are applied
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Relationship of Taxes to Income
•Proportional Tax – takes the same percent
out of everyone’s income
•Progressive Tax – takes a larger percentage of
income from high-income people than of low-income
people
•Regressive Tax – takes a larger percentage of the
income from low-income people than of high-income
people
•Tax is usually viewed as unfair
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How Taxes are Spent
•Federal Level - a large portion of government
spending goes to paying for social programs
•State and Local Level – a large portion goes
towards education, public assistance,
transportation, public safety and health care.
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