Chapter Introduction
Section 1: Economic Systems
Section 2: Characteristics of the
American Economy
Section 3: The Goals of the
Nation
Section 4: Socialism and
Capitalism
Visual Summary
Every society has an economic
system to allocate goods and
services.
As an American, you have many
economic choices available to
you. Not all nations offer their
citizens the same economic
choices that most Americans
enjoy. In this chapter, read to
learn how the American economy
is different from the economies of
some other countries.
Section Preview
In this section, you will learn about the four
basic types of economic systems and how
each one answers the three basic
questions of what, how, and for whom to
produce.
Do you know much about the
different economic systems that
exist?
A. A good amount of
information
A
0%
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C
C. Not a lot of information
A. A
B. B
C.0%C
B
B. A moderate amount
of information
Three Basic Questions
All economic systems face the same
basic questions: What should be
produced? How should it be produced?
For whom should it be produced?
Three Basic Questions (cont.)
• The way a nation uses its resources to
satisfy its people’s needs and wants is
called an economic system.
Three Basic Questions (cont.)
• An economic system must ask three basic
questions:
– What goods and services should be
produced?
• If more of one particular item is produced,
then less of something else will be produced.
– How should they be produced?
• Decisions must be made as to what the best
combination of available inputs will be to get
the job done for the lowest possible cost.
Three Basic Questions (cont.)
– For whom should it be produced?
• The type of economic system under which
people live determines how the goods and
services will be distributed among its
members.
Deciding how many laborers to hire
falls under which question?
A. What goods and
services should be
produced?
0%
C
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A
C. Who should share in
what is produced?
A. A
B. B
C.0%C
B
B. How should they be
produced?
Types of Economic Systems
There are four basic types of economic
systems: traditional, command, market,
and mixed.
Types of Economic Systems (cont.)
• Economists have identified four theoretical
types of economic systems.
• The traditional economy system makes
decisions based on customs and beliefs
that have been handed down from
generation to generation.
Types of Economic Systems (cont.)
• Advantages:
– You know what is expected of you.
– Family and community ties are strong.
Types of Economic Systems (cont.)
• Disadvantages:
– Change is discouraged and perhaps
punished.
– Methods of production are often
inefficient.
– Choices among consumer goods are
rare.
– Individuals rarely experience an
increased level of material well-being.
Types of Economic Systems (cont.)
• In a command economy (or controlled)
system, government leaders control the
factors of production and make all
decisions about their use.
Types of Economic Systems (cont.)
• Disadvantages:
– Lack of incentives to work hard or show
inventiveness.
– Lack of consumer choices.
Types of Economic Systems (cont.)
• In a market economy (or capitalist)
system, individuals own the factors of
production and make economic choices
based on market price while looking out for
their own and their families’ best interests.
• A market is the voluntary exchange of
goods and services between buyers and
sellers.
• Prices in a market coordinate the
interaction between buyers and sellers.
Types of Economic Systems (cont.)
• The flow of resources, goods and services,
and income in a market system is a
circular flow of income and output.
View: Circular Flow of Income and Output
Types of Economic Systems (cont.)
• Advantages:
– People have freedoms.
– Competition provides consumers with a
wide array of goods and services to
choose.
– There is an efficient system of
determining costs.
Types of Economic Systems (cont.)
• Disadvantages:
– Lack of concern about those too young,
too old, or too sick to work.
Types of Economic Systems (cont.)
• A mixed economy system combines
characteristics of more than one type of
economy.
• Most countries have a mixed economy in
which private ownership of property and
individual decision making are combined
with government intervention and
regulations.
In which type of system would you be
“guided” into a career by a group of
central planners?
A. Traditional
B. Command
C. Market
D. Mixed
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A
A.
B.
C.
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D.
B
A
B
C
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D
C
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D
Section Preview
In this section, you will learn about the
major characteristics of a market economic
system.
How much does advertising affect
you?
A. A lot
B. A little
0%
C
A
0%
A. A
B. B
C.0%C
B
C. Not at all
Limited Role of Government
Under capitalism, government plays a
relatively limited role in the allocation
of resources.
Limited Role of Government (cont.)
• Capitalism is another name for the market
economy system.
• Pure capitalism has been called a
Laissez-faire system; a French term
meaning “let (people) do (as they
choose).”
Limited Role of Government (cont.)
• Capitalism in the United States is best
defined as an economic system in which
private individuals own the factors of
production but use them within certain
legislated limits.
Since the 1880s, the role the
government plays in regulation has
remained predominantly the same.
A. True
B. False
A. A
B. B
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B
A
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Other Characteristics
In a free market, economic activity is
coordinated by private businesses and
individuals responding to market
signals.
Other Characteristics (cont.)
• The American economy is known as a free
enterprise system. Individuals are free to
own the factors of production and decide
how to use them within legal limits; same
as capitalism.
Other Characteristics (cont.)
• Americans also have freedom of choice
where buyers, not sellers, make the
decisions about what should be produced.
– At times, the government has intervened
in various areas of the economy to
protect buyers and regulate price.
• The goal of a business is to make a profit.
Other Characteristics (cont.)
• The desire to make a profit is referred to
as profit incentive or profit motive.
• The risk of failing, when profits are not
realized, is also part of the free-enterprise
system.
• In a free-enterprise system, the lure of
profits encourages competition.
• For competition to exist, industry barriers
to enter into, and exit from must be weak.
Other Characteristics (cont.)
• Competition leads to an efficient use of
resources since businesses are forced to
keep costs of production as low as possible.
• One of the most important characteristics of
capitalism is the existence of private
property.
View: Characteristics of the American Economy
How much freedom should individuals
have regarding the economy?
A. A large amount
B. A moderate amount
0%
C
A
0%
A. A
B. B
C.0%C
B
C. A small amount
Section Preview
In this section, you will learn about the
goals of the American free-enterprise
system and the rights and responsibilities
that individual Americans face as members
of this system.
Do you think the United States
upholds certain economic values?
A. Always
B. Sometimes
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C
A
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A. A
B. B
C.0%C
B
C. Rarely
Goals of Free Enterprise
The economic goals of free enterprise
are freedom, efficiency, equity, security,
stability, and growth.
Goals of Free Enterprise (cont.)
• Economic goals of Americans:
– Freedom—to allow each member of
society to make choices
– Economic efficiency—wise use of
limited resources
– Economic equity—economic system
should be fair and just
Goals of Free Enterprise (cont.)
– Economic security—want protection
against risks beyond our control
– Economic stability—attempt to reduce
extreme ups and downs in the standard
of living
– Economic growth—increased
production of goods and services over
time
“Because of scarcity, if the factors of
production are wasted, fewer good and
services overall will be produced.”
Which goal does this quotation fall
under?
D. Growth
A
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D
C. Security
A
B
C
D
C
B. Efficiency
A.
B.
C.
D.
B
A. Freedom
Rights and Responsibilities
Individuals have both rights and
responsibilities within a free-enterprise
system.
Rights and Responsibilities (cont.)
• The American free-enterprise system
bestows numerous economic rights and
protections on us, but we must take on
certain responsibilities (such as supporting
ourselves and our family).
• We must also become knowledgeable
about government policies and elect
responsible government officials.
Do you feel that, according to this book,
most Americans are responsible?
A. Always
B. Sometimes
0%
C
A
0%
A. A
B. B
C.0%C
B
C. Rarely
Section Preview
In this section, you will compare the
characteristics of socialism and capitalism.
Content Vocabulary
• socialism
• proletariat
• communism
• democratic socialism
• authoritarian socialism
Academic Vocabulary
• continual
• initiative
Can you define socialism?
A. Yes
B. No
A. A
B. B
0%
B
A
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Pure Socialism
Pure socialism is characterized by
centralized economic planning and
state ownership of the factors of
production.
Pure Socialism (cont.)
• Pure command socialism is an economic
system in which there is little private
property and the government owns the
factors of production and attempts to
manage output and the distribution of
goods.
View: Pure Socialism
Pure Socialism (cont.)
• Karl Marx viewed history as a continual
struggle between capitalists (owners of
land, machines, and factories) and the
proletariat (workers).
– He believed that the capitalists exploited
the proletariat.
View: The Change From Capitalism to
Socialism According to Marx
Pure Socialism (cont.)
• He outlined the eventual collapse of
capitalism and predicted the evolution of
socialism into communism, an idealized
society in which no government is
necessary.
• Today, communism means any
authoritarian socialist system that supports
revolution as a means to overthrow
capitalism and bring about socialist goals.
Pure Socialism (cont.)
• In the twentieth century, socialism split into
two major trends:
– Democratic socialism
– Authoritarian socialism
The following are characteristics of pure
socialism EXCEPT
A. Most prices are set by
the state.
B. Individual risk taking is
not allowed.
0%
C
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B
A
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D
A. A
B. B
C. C
D. Most of the major factors of
production are owned by the state.
D. D
C. A laissez-faire government
is in control.
The Benefits of Capitalism
The main benefits of capitalism are
economic efficiency and individual
freedom.
The Benefits of Capitalism (cont.)
• Supporters of capitalism:
– Those who place a high value on
personal freedom, initiative, and
individuality.
– Demonstrate that capitalism allows for
more efficiency in the marketplace and
for greater rates of economic growth.
View: Planning in Market and
Command Economies
The Benefits of Capitalism (cont.)
• The United States has an economy
planned by private firms, individuals, and
elected government officials, while
socialism has an economy planned by
central planners.
• Problems of capitalism:
– Income is unequally distributed
throughout the economy.
– There are not enough schools and
museums for the general public.
Do you feel that capitalism is
beneficial for the economy?
A. Definitely
B. Somewhat
0%
C
A
0%
A. A
B. B
0%
C. C
B
C. Not at all
All economic systems answer three basic
questions: what to produce, how to
produce, and for whom to produce.
There are four basic types of economic
systems: traditional, command, market, and
mixed.
The American economy is defined by six
basic characteristics.
Economic Concepts
Transparencies
Transparency 4 Economic Systems
Transparency 7 Markets and Prices
Select a transparency to view.
economic system: way in which a
nation uses its resources to satisfy its
people’s needs and wants
traditional economy: system in
which economic decisions are based
on customs and beliefs that have
been handed down from generation
to generation
command economy: system in
which the government controls the
factors of production and makes all
decisions about their use
market economy: system in which
individuals own the factors of
production and make economic
decisions through free interaction
while looking out for their own and
their families’ best interests
market: the process of freely
exchanging goods and services
between buyers and sellers
circular flow of income and output:
economic model that pictures income
as flowing continuously between
businesses and consumers
mixed economy: system combining
characteristics of more than one type
of economy
capitalism: economic system in
which private individuals own the
factors of production
laissez-faire: economic system in
which the government minimizes its
interference with the economy
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
profit: amount earned after a
business subtracts its costs from its
revenues
profit incentive: desire to make
money that motivates people to
produce and sell goods and services
competition: rivalry among
producers or sellers of similar goods
and services to win more business
private property: whatever is owned
by individuals rather than by
government
economic efficiency: wise use of
available resources so as to obtain
the greatest benefits possible
economic equity: the attempt to
balance an economic policy so that
everyone benefits fairly
standard of living: the material wellbeing of an individual, 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
socialism: a system in which the
government owns the major factors of
production and attempts to manage
output and the distribution of goods
proletariat: term Karl Marx used to
refer to workers
communism: term used by Karl Marx
for his idealized society in which no
government is necessary
democratic socialism: system that
works within the constitutional
framework of a nation to elect
socialists to office; the government
usually controls only some areas of
the economy
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
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