Chapter Introduction
Section 1: Economic
Systems
Section 2: Evaluating
Economic
Performance
Section 3: American Free
Enterprise
Visual Summary
Take a closer look at the way your
high school is organized. Who
makes the decisions on lesson
plans? Who plans out events that
take place during the year? Who
makes financial decisions, and
how? Are parents and voters
involved in the educational system?
Obtain information from your school
district office or the library to create
a chart that lists the rights and
responsibilities of people in your
school district to meet the needs of
education. Read Chapter 2 to learn
about the different economic
systems that societies set up to
meet their specific economic needs.
Every society has an
economic system to allocate
goods and services.
Section Preview
In this section, you will learn about the different
types of economic systems that govern WHAT
goods and services to produce, HOW to produce
them, and FOR WHOM to produce them.
Content Vocabulary
• economic system • market
economy
• traditional
economy
• market
• command
economy
• allocate
• communism
• capitalism
• mixed economy
Academic Vocabulary
• stagnation
• socialism
• emphasizing
Are you familiar with the similarities
and differences between a market
economy and a command economy?
A. Yes
A
0%
0%
C
C. Somewhat
A. A
B. B
C.0%C
B
B. No
Economic Systems
• All societies use an economic system to
provide for needs and wants of their people.
• Three major economic systems exist:
– Traditional
– Command
– Market
Comparing Economic Systems
Economic Systems (cont.)
• Most economies combine elements of
the three.
Comparing Economic Systems
Traditional Economies
Traditional societies use
ritual, habit, or customs to
answer the basic questions of
WHAT, HOW, and FOR WHOM
to produce.
Traditional Economies (cont.)
• A traditional economy—use of scarce
resources and economic activity is based
on habit or custom.
Traditional Economies (cont.)
• Advantages
– Everyone knows which role to play.
– Little uncertainty on what or how to
produce.
– Customs and traditions determine who is
provided for.
Traditional Economies (cont.)
• Disadvantages
– Individuals generally not free to make
decisions
– New ideas discouraged, leading to
stagnation and a lower standard of living
– Strict rules defined by elders and
ancestors
Which of the following societies
operate under a traditional economy?
A. Australian Aborigines
B. Botswana
C. Mbuti
D. All of the above
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
Command Economies
Command economies rely on
a central authority to make
most of the economic
decisions.
Command Economies (cont.)
• A central authority makes the major
decisions in a command economy.
Command Economies (cont.)
• Advantages
– Can change direction drastically through
emphasizing/allocation
– Health and public services available to
everyone at little or no cost
Command Economies (cont.)
• Disadvantages
– Basic wants and needs of consumers
are ignored.
– Economies tend to be unproductive, not
producing a good product.
– Large decision-making bureaucracy
lacks flexibility.
Command Economies (cont.)
– Severely limits private property rights
– Individual freedom and initiative are
limited.
Which is a disadvantage of a
command economy?
A. Large decision-making
body needed
0%
C
B
C. Can change from a
rural society to an
industrial nation in
a few decades
A. A
B. B
0% C0%
C.
A
B. Health and public services
available to everyone
Market Economies
In a market economy,
consumers and businesses
jointly answer the questions
of WHAT, HOW, and FOR
WHOM to produce.
Market Economies (cont.)
• A market economy allows people to make
decisions in their own best interest.
• Buyers and sellers exchange goods and
services in a market.
• Market economies are based on
capitalism.
• Capitalism means that the factors of
production are privately owned.
Market Economies (cont.)
• Advantages
– High degree of individual freedom
– Adjusts gradually to change over time
– Small degree of government
interference
– Decision making is decentralized
– Large variety of goods and services
– High degree of consumer satisfaction
Market Economies (cont.)
• Disadvantages
– Not everyone is provided for
– May not provide enough of some basic
goods and services
– High degree of uncertainty for workers
and employers
In the following areas, do you think
government needs to increase or
decrease its presence?
A. National defense
B. Environmental protection
C. Care for elderly and
disabled
A. A
B. B
0%
0%
C. C
A
B
0%
C
Mixed Economies
Most economies in the world
today feature some mix of
traditional, command, and
market economies.
Mixed Economies (cont.)
• Most economies in the real world are
mixed economies.
• When political systems are considered
with economic systems, the picture gets
more complicated.
• An example is socialism and its extreme,
communism.
The Spectrum of Mixed Economies
Mixed Economies (cont.)
• The type of political system in a mixed
economy is less important than the way
basic economic decisions are made.
The Spectrum of Mixed Economies
Mixed Economies (cont.)
• Advantages of a mixed economy
– Provides assistance for some people
who might otherwise be left out
– In a democratic society, voters use
electoral power to affect WHAT, HOW,
and FOR WHOM decisions.
– In a socialist society, FOR WHOM is
addressed more directly by government.
Mixed Economies (cont.)
• Disadvantages
– More services mean higher costs for
citizens overall.
– In socialist countries, availability of
services may be limited or quality
deteriorates over time.
What is the main advantage of a
mixed economy?
A. Ownership and control by
government
A
C. Provides assistance to
people otherwise left out
B
A. A
B. B
0%
0%
C. C
0%
C
B. More services are provided
at a higher cost to citizens.
Section Preview
In this section, you will learn how economic
freedom, economic security, and economic equity
are related to the level of satisfaction people have
with their economic systems.
Content Vocabulary
• minimum
wage
• Social
Security
• inflation
• fixed income
Academic Vocabulary
• adverse
• accommodate
What happens when our economic
system fails to achieve our goals?
A. Societies demand laws to
modify system until needs
are met.
0%
D
0%
C
D. Inflation occurs.
A
B
0%
C
D
B
C. A command society results.
A.
B.
0%
C.
D.
A
B. The government collapses.
Economic and Social Goals
Americans share several
major economic and
social goals.
Economic and Social Goals (cont.)
• In the United States, there are seven
major economic and social goals:
– Economic freedom
– Economic equity
• The minimum wage was established on a
national level.
• Many states established lemon laws.
Economic and Social Goals (cont.)
– Economic security
• Social Security was established for disabled
or retired beneficiaries.
– Full employment
Economic and Social Goals (cont.)
– Price stability
• Inflation makes paying bills difficult for
individuals on a fixed income.
• High rates of inflation discourage business
activity.
– Economic growth
Economic and Social Goals (cont.)
• As our society evolves, more goals may
become important to us.
Do you think the current list of seven
goals is enough?
A. Yes
B. No
A. A
B. B
0%
A
0%
B
Resolving Trade-Offs Among Goals
Conflicts among goals can be
solved by comparing the cost
of a goal to its benefit.
Resolving Trade-Offs Among Goals (cont.)
• Individuals have different ideas on how to
reach a goal or on the goal itself.
• Our economic policies have opportunity
costs and trade-offs.
Resolving Trade-Offs Among Goals (cont.)
• In many cases, trade-offs among goals are
resolved when people compare their
estimate of the costs to their estimate of
the benefits and then vote for candidates
accordingly.
• The U.S. economy is flexible enough to
allow choices, accommodate compromises,
and still satisfy the majority of Americans.
Do you support the preservation of
endangered species such as the
California Channel Islands fox?
A. Completely
B. Somewhat
C. Not at all
0%
A
A. A
B. B
C.0%C
B
0%
C
Section Preview
In this section, you will learn how under capitalism
the basic economic decisions of WHAT, HOW,
and FOR WHOM to produce are made through
the free interaction of individuals looking out for
their own best interests.
Content Vocabulary
• free enterprise • profit
• voluntary
exchange
• profit motive
• competition
• private property
• consumer
rights
sovereignty
Academic Vocabulary
• incentive
• catalyst
• regulator
• mixed or
modified free
enterprise
economy
Can you name any countries that
operate a free enterprise economy?
A. Yes
B. No
A. A
B. B
0%
A
0%
B
American Free Enterprise
• In many parts of the world, capitalism has
become the economic choice.
• Capitalism allows private citizens to own
and use the factors of production to
generate profits.
• The U.S. economy is based on free
enterprise.
Characteristics of Free Enterprise Capitalism
American Free Enterprise (cont.)
• Capitalism and free enterprise are often
used interchangeably, although meanings
are different.
– Capitalism stands for the private
ownership of resources.
– Free enterprise is the unhindered use of
privately owned resources to
earn profits.
Characteristics of Free Enterprise Capitalism
Characteristics of Free Enterprise
Capitalism
The American economy
incorporates the main
characteristics of a free
enterprise economy.
Characteristics of Free Enterprise
Capitalism (cont.)
• There are five major characteristics of a
free enterprise economy:
– Economic freedom
– Voluntary exchange
Characteristics of Free Enterprise Capitalism
Characteristics of Free Enterprise
Capitalism (cont.)
– Private property rights
• Private property gives individuals incentive to
work, save, and invest.
– Profit motive
• People are free to take risks to earn a profit.
– Competition
Characteristics of Free Enterprise Capitalism
What is largely responsible for the
growth of a free enterprise system?
A. Competition
B. Profit motive
C. Voluntary exchange
0%
A
A. A
B. B
C.0%C
B
0%
C
The Role of the Entrepreneur
Entrepreneurs are the driving
force of the free enterprise
system.
The Role of the Entrepreneur (cont.)
• Entrepreneurs
– Organize and manage land, capital, and
labor to gain a profit
– Are the people who start up new
businesses
– Want to “be their own boss”
– Are willing to take risks
The Role of the Entrepreneur (cont.)
• Entrepreneurs are both the spark plug and
the catalyst of the free enterprise
economy.
• Their search for profits leads to a chain of
events that brings
– New products
– Greater competition
The Role of the Entrepreneur (cont.)
– More production
– Higher quality
– Lower prices for consumers
Profiles in Economics:
Tony Hawk
Why might an entrepreneur fail?
A. Not enough capital
B. Poor product or service
C. Not aware of competition
D. All of the above
0%
A
A. A
B. B
C.0% C 0%
D. D
B
C
0%
D
The Role of the Consumer
The economy in the
United States adapts
to consumers’ wants.
The Role of the Consumer (cont.)
• Consumers ultimately determine which
products are produced.
• If consumers like a new product,
producers are rewarded with profits.
• Consumers not purchasing a product can
cause a firm to go out of business.
The Role of the Consumer (cont.)
• The phrase “the customer is always right”
recognizes consumer sovereignty.
• Consumers are always looking for new
ideas and products.
Do you believe that “the customer is
always right”?
A. Always
B. Sometimes
C. Never
0%
A
A. A
B. B
C.0%C
B
0%
C
The Role of the Government
The economic role of the U.S.
government is decided by its
citizens.
The Role of the Government (cont.)
• The role of government stems from the
desires, goals, and aspirations of its
citizens.
The Role of the Government (cont.)
• Government has become
– A protector
– Provider
– Regulator
– Consumer
The Role of the Government (cont.)
• In general, the role of government in the
economy is justified whenever the benefits
outweigh the costs.
• An unintended consequence of
government’s role is the emergence of the
mixed or modified free enterprise
economy.
The Role of the Government (cont.)
• Some people prefer to have no
government involvement in the economy—
which is not possible.
• Services like a national defense and a
system of laws and justice cannot be
supplied by the private sector alone.
Do you agree or disagree with the
statement that the role of government in
the economy is justified whenever the
benefits outweigh the costs?
A. Always
0%
0%
C
0%
B
C. Never
A. A
B. B
C. C
A
B. Sometimes
Economic Systems Most countries have a mix of
three different types of economic systems.
Economic and Social Goals In the United States,
we share several economic and social goals.
Free Enterprise The U.S. economic system is
based on the free enterprise system and is
characterized by competition and private ownership
of resources.
Tony Hawk (1968– )
• professional athlete at age
14 and best skateboarder in
the world by age 16
• owner of a successful
business empire based on
resurgence of skateboarding
and name recognition
economic system
organized way in which a society
provides for the wants and needs of
its people
traditional economy
economic system in which the
allocation of scarce resources and
other economic activities are based
on ritual, habit, or custom
command economy
economic system characterized with
a central authority that makes most of
the major economic decisions
market economy
economic system in which supply,
demand, and the price system help
people make decisions and allocate
resources
market
meeting place or mechanism that
allows buyers and sellers to come
together
capitalism
economic system in which private
citizens own and use the factors of
production in order to generate profits
mixed economy
economic system that has some
combination of traditional, command,
and market economies
socialism
political and economic system in
which the government owns and
controls some factors of production
communism
economic and political system in
which all factors of production are
collectively owned and controlled by
the state
stagnation
lack of movement
allocate
to assign
emphasizing
stressing
minimum wage
lowest wage that can be paid to most
workers
Social Security
federal program of disability and
retirement benefits that covers most
working people
inflation
rise in the general level of prices
fixed income
income that does not increase even
though prices go up
adverse
unfavorable or harmful
accommodate
to allow for
free enterprise
capitalistic economy in which
competition is allowed to flourish with
a minimum of government
interference
voluntary exchange
act of buyers and sellers freely and
willingly engaging in market
transactions
private property rights
fundamental feature of capitalism that
allows individuals to own and control
their possessions as they wish
profit
extent to which persons or
organizations are better off financially
at the end of a period than they were
at the beginning
profit motive
incentive that encourages people and
organizations to improve their
financial and material well-being
competition
the struggle among sellers to attract
consumers
consumer sovereignty
role of consumer as ruler of the
market when determining the types of
goods and services produced
mixed or modified free
enterprise economy
economy where people carry on their
economic affairs freely but are subject
to some government intervention and
regulation
incentive
something that motivates
catalyst
something that stimulates activity
among people or forces
regulator
someone or something that controls
activities
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