Economic Systems
and the American
Economy
Chapter 2
Learning Objective
• I can describe the 3 basic questions that all economics systems
attempt to answer
Three Basic Questions
• Economic System
• Economic System Answers 3 Questions
• What Should Be Produced?
• For Whom Should It Be Produced?
Learning Objective
• I can identify advantages and disadvantages of traditional,
market, command, and mixed economic systems.
Types of Economic Systems
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Traditional System
Command System
Market System
Mixed System
Traditional
• Questions answered by how they have been done in past.
(often religious)
• Advantages
• Disadvantages
– Change Discouraged (punished)
– Limited Consumer Choices
Command
• Government leaders control FOP and make all decisions
(single person or central group)
• Advantages
• Necessities at Little or No Cost
• Disadvantages
• Limited Consumer Choices
Market
• Individuals own FOP and therefore make all decisions.
• Market –
Market Cont.
• Advantages
– Freedoms
• Career
• Property Ownership
– Lots of Choices in Goods Due to Competition
• Disadvantages
– No concern over elderly, disabled, or too young to work.
Mixed
• Combines elements of Pure Market and Command.
• Individual decision making and private ownership ALONG
WITH government intervention and regulation.
Learning Objective
• I can identify and describe characteristics of the American
Economy
Characteristics of the American
Economy
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Limited Role of Government
Freedom of Enterprise
Freedom of Choice
Profit Incentive
Competition
Private Property
Limited Role of Government
• Adam Smith (1776) An Inquiry into the Nature and Causes of
the Wealth of Nations –
• Pure Capitalism (Market) – Laissez-Faire –
• U.S. – Let People Own Businesses and Industries BUT
Freedom of Enterprise
• Private ownership of property and businesses.
• Entrepreneurship –
• Within Certain Limits However
• Zoning Regulations
Freedom of Choice
• Government Intervention
• Regulates Prices (under limited competition)
Profit Incentive
• Desire to Make a Profit
• Losses? Signal to move elsewhere.
Competition
• Requires large number of independent sellers
• But High Enough for Profits
• Must have little stopping entering and exiting
Private Property
• Constitution guarantees an owner’s right to private property
and its use
Learning Objective
• I can identify and describe the 6 goals of the American
Economy
Goals of Free Enterprise
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Economic Freedom
Efficiency
Equity
Security
Stability
Growth
Economic Freedom
• Free to Make Choices
• Start own Businesses
• Must Accept Consequences
Economic Efficiency
• Scarcity a Problem
Economic Equity
• Lawmakers pass wage laws
• Discrimination laws
Economic Security
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Work Related Injuries
Natural Disasters
Bank Failure
Old Age
Economic Stability
• Measured by average value of goods and services used by
average citizen during given period of time.
• We have more enjoying highest SOL than anywhere in world.
Economic Growth
• Must happen WHY???
Rights and Responsibilities
• Rights
• Can work as hard as you want
• Responsibilities
• Ability to support you and family
• Electing responsible officials:
• Ability to analyze consequences of policies
Learning Objective
• I can describe both Pure Socialism and Pure Communism
Pure Socialism
•
– North Korea, Cuba
•
– The Communist Manifesto (1848)
• Bourgeoisie vs. Proletariat
• History – Struggle between classes
• Used their labor then kept profits
• Would evolve into Socialism then Communism – System with no need for
government
• Proletariat actually has little to no power
Characteristics of Pure
Socialism
• Prices set by State – Not by Supply and Demand
• Most Factors of Production Owned by the State. Private
Property Limited to Tools Needed for Occupation
• What, How, and for Whom to Produce Made by
4 Steps in Change to Socialism
1. Extreme Recessions and Depression
- Only A Few Wealthy Would Emerge
2.
3. New System Established
State)
4. Evolve to Pure Communism –
(Through The
Socialism Since Marx
• Democratic Socialism –
• Government Controls Some Areas of Economy
• Venezuela
• Authoritarian Socialism –
• Central Government Controls Entire Economy
• North Korea, Cuba
Benefits of Capitalism
• Socialism: Total Government Interference
• Socialism: Growth Stagnant
Planned Economies
• ALL ECONOMIES ARE PLANNED
• Difference is who is doing the planning:
• Socialism: Government Does the Planning
• Capitalism: Individuals, Businesses, Elected Officials do the
planning
• Problems with Capitalism:
• Income Inequality
• Lacks enough Public Assistance (socialism offers)