 Each
country has an economic and political
system.
 The political system determines the
economic system.
 Three basic types:
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Capitalism
Socialism
Communism
 Capitalism
is an economic-political system in
which private citizens are free to go into
business for themselves, to produce
whatever they choose, and to distribute
what they produce.
 the right to own property.
 Also known as the free enterprise system
 Socialism
is an economic-political system in
which the government controls the use of the
country’s factors of production.
 Socialists do not agree as to how much of the
productive resources government should
own.
 Socialism is often associated with mixed
economies.
 Socialism
is generally disliked in the U.S.
because it limits the right of the individual to
own property for productive purposes.
 The right to own property exists in socialism,
in different degrees, depending upon the
amount of government ownership and
control.
 Ex. Sweden, Italy.
 Communism
is extreme socialism, in which
all or almost all of a nation’s factors of
production are owned by the government.
 The government decided what and how to
produce and how to divide the results of
production among the citizens.
 Consumer goods are often in short supply.
 The government channels a large proportion
of production toward capital formation.
 People do not own property. All economic
decisions are made by government leaders.
 Right
to private property.
 Right of each business to make profit.
 Right of each business to set its own prices.
 Right to compete.
 Right to determine wages paid to its workers
 Private
property consists of items of value
that individuals have the right to own, use,
and sell. Individuals can control productive
resources.
 They can own land, hire labor, and own
capital goods.
 They can use these resources to produce
goods and services.
 Individuals own products made from their
resources.
 In
capitalism, the incentive and reward for
producing goods and services with utility is
profit.
 Profit = Sales - Expenses
 The profit earned by a business is often
overestimated by society. The average profit
is about 5 percent of total receipts.
 Being in business does not guarantee that a
company will make a profit.
 Demand
for a product refers to the number
of products that will be bought at a given
time at a given price.
 Demand is not the same as want. Wanting an
expensive luxury car without having the
money to buy one does not represent
demand.
 Demand is represented buy those people who
want it, have the money to buy it, and are
willing to spend the money for it.
 There
is a relationship between price and
demand.
 With increased demand, prices generally rise
in the short run.
 When demand decreases, prices generally
fall.
 The
supply of a product also influences its
price.
 Supply of a product refers to the number of
like products that will be offered for sale at
a particular time and at a certain price.
 If there is a current shortage of a product, its
price usually rises as consumers bid against
one another to obtain the product.
 Generally
changes in prices determine what
is produced and how much is produced in our
economy.
 Price changes indicate to businesses what is
profitable or not profitable to produce.
Prices are determined by the forces of supply
and demand.
 Competition
is the rivalry among sellers for
consumer’s dollars.
 Competition benefits society in many ways:
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a business must improve the quality of products
develop new products
operate efficiently in order to keep prices down
 Competition
serves to ensure that consumers
will bet the quality products they want at
fair prices.
 tends
to make all businesses use our scarce
productive resources efficiently.
 benefits individuals because it provides the
chance for people to go into business for
themselves and to share in the profits being
made by those already in business.
 Competition is the opposite of monopoly.
 Monopoly
is the existence of only one seller
of a product. A monopolist can charge
unreasonably high prices and make
extraordinary profits.
 Legislation exists that can encourages
competition and discourages monopolies
 Countries
must also decide how the goods
produced will be divided among the people
in the society.
 In a free enterprise economy, the share of
goods produced that an individual receives is
determined by the amount of money that
person has to purchase goods and services.
 People receive income – wages and salariesby contributing their labor to the production
of goods and services.
 The
amount of money received in wages or
salary is determined by many factors,
including personal traits and abilities.
 The same factors that determine the prices
of goods are also important in determining
wages and salaries.
 Supply and demand.
 The
strength of a nation depends on its
economic growth. Economic growth is
measured by:
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annual increase in the GDP
increased employment opportunities
continuous development of new and improved
goods and services
 Economic
growth occurs when a country’s
output exceeds its population growth.
 More goods and services are available for
each person.
 Basic ways to increase the production of
goods and services in order to encourage
economic growth:
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increase the number of people in the workforce
increase the productivity of the workforce
increase the supply of capital goods
improve technology
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redesign work processes in factories and offices
to improve efficiency
increase the sale of goods and services to foreign
countries
decrease the purchase of goods and services from
foreign countries
 For
economic growth to occur, just increasing
the production of goods and services is not
enough. They must also be consumed.
 To
know whether the economy is growing at
a desirable rate, statistics must be gathered.
 GDP (Gross Domestic Product)
 CPI (Consumer Price Index)
 Employment
 Retail Sales
 New Home Sales
 The
total market value of all final goods and
services produced in a country in a given
year, equal to total consumer, investment
and government spending, plus the value of
exports, minus the value of imports.
 The
CPI indicates what is happening in
general to prices in the country.
 It measures the average change in prices of
consumer goods and services typically
purchased by people living in urban areas.
 An
economic condition marked by the fact
that individuals actively seeking jobs remain
unhired.
 Unemployment is expressed as a percentage
of the total available work force.
 The level of unemployment varies with
economic conditions and other
circumstances.
 broad
consumer spending patterns based on
the retail sales of consumer-durables (goods
that usually last more than three years) and
consumer non-durables (that usually last less
than three years).
 Measure
of how many new homes were for
sale and how many were sold.
 Problems
occur with the economy when the
growth rate jumps ahead or drops back too
quickly.
 Recession is a decline in the GDP that
continues for six months or more. Occurs
when demand for the total goods and
services available is less than the supply
 Inflation
is the rapid rise in prices caused by
an inadequate supply of goods and services.
Total demand exceeds supply. Results in a
decline in purchasing power of money.
 Most
industrialized nations experience
business cycles, a pattern of irregular but
repeated expansion and contraction of the
GDP. Business cycles last about five years.
Four phases:
 Expansion
 Peak
 Contraction
 Trough
 They
can vary in length and intensity.
 Some can be severe.
 When statistics show that the economy may
be about to enter a recessionary period
(contraction) or an inflationary period
(expansion), the government can take
certain actions.
 Controlling taxes, regulating government
expenditures, and adjusting interest rates.
 Controlling
Taxes
 Taxes are raised to slow growth and lowered
to encourage growth.
 When taxes are raised, there is less money to
spend, which discourages economic growth.
 When taxes are lowered, people and
businesses have more money to spend which
encourages growth.
 Government
Expenditures
 Federal government spends billions of dollars
each year to pay salaries and buy equipment.
 Government can increase its spending to
stimulate a slow economy or reduce spending
to slow economic growth.
 Interest
Rates
 Interest rates is the money paid to borrow
money.
 Borrowing by businesses and consumers
generates spending.
 Spending stimulates the economic growth.
 When interest rates are lowered, businesses
are encouraged to borrow.
 Using
these and other methods, the
economic growth can be somewhat
controlled,
 however, it is usually kept to a minimum in a
free enterprise system.