Capitalist and Mixed Systems
Key Terms
scarcity, traditional economy, command economy,
market economy, factors of production,
entrepreneur, monopoly, profit, mixed economy
Find Out
• What are the characteristics of capitalism that
differentiate it from socialism and communism?
• Why can the economy of the United States be
called a mixed economy?
Capitalist and Mixed Systems
Understanding Concepts
Free Enterprise What kinds of economic choices
do individuals make in a free enterprise system?
Section Objective
Identify the factors of production in economic
systems and the chief characteristics of capitalism.
In 1776 Adam Smith described capitalism
as an economic system controlled by an
“invisible hand.” According to Smith,
through self interest this invisible hand
moves people to decide what goods and
services to produce, how to produce them,
and to whom to distribute them. Adam
Smith’s ideas were popularized in his book
The Wealth of Nations, which was
published in the same year the United
States declared its independence.
I. Factors of Production (pages 717–718)
A. The resources of an economic system are
called factors of production.
B. Factors of production fall into four
categories:
1) land,
2) labor,
3) capital,
4) entrepreneurs.
I. Factors of Production (pages 717–718)
Are all of the factors of production equally
important in the economy? Explain.
If any factor is less important, it is still
essential to production.
II. Forms of Economic Organization (page 718)
A. Three major forms of economic organization
represent the range of economic systems
that determine how the factors of production
are allocated.
B. Communism is a command economic system.
C. Socialism is a partial command
economic system.
D. Capitalism is an economic system in which
individual producers and consumers make
the economic decisions in free markets.
II. Forms of Economic Organization (page 718)
II. Forms of Economic Organization (page 718)
What do you think are the advantages and
disadvantages of a communist system?
Explain.
Answers will vary. Lack of incentives, central
planning, little individual freedom.
III. Characteristics of Capitalism (pages 718–721)
A. In the United States and several industrial
countries, capitalism is the basic
economic system.
B. Capitalism, also called a free enterprise
system, is based on private ownership and
on individual economic freedom.
C. Capitalists range from small store owners,
persons who own a few shares of stock in a
corporation, to industrialists who own large
factories, mines, and financial institutions.
D. Capitalism encourages people to become
entrepreneurs.
III. Characteristics of Capitalism (pages 718–721)
E. Competition among sellers of products
and services is another characteristic
of capitalism.
F. Buyers, sellers, and workers have freedom
of choice in a capitalist system.
G. The capitalist system is based on the
profit motive.
III. Characteristics of Capitalism (pages 718–721)
What do you think are the advantages and
disadvantages of a capitalist system?
Answers will vary. Free enterprise, private
ownership, individual initiative, competition.
IV. Changing Face of Capitalism (page 721)
A. Capitalism in the United States contains
some elements of a command economy.
B. Since the late 1800s, the federal
government has increased its role in
the economy.
C. The federal government has adopted
regulatory laws to ensure competition
and safety.
IV. Changing Face of Capitalism (page 721)
D. In Japanese capitalism, the government
works closely with business to limit foreign
competition. In South Korea, Singapore, and
Taiwan the government has a similar close
relationship with business.
E. Generally, the capitalist economies of
Western European nations are more
controlled and regulated than that of the
United States.
IV. Changing Face of Capitalism (page 721)
How might the relationship between
government and business change in
capitalist nations during the twentyfirst century?
Answers will vary. Discuss the increasing or
decreasing role of government in economies.
Checking for Understanding
1. Main Idea Use a graphic organizer like the one
below to identify five characteristics of capitalist
economies.
private ownership, individual initiative,
competition, freedom of choice, profit and loss
Checking for Understanding
Match the term with the correct definition.
___
B scarcity
___
C entrepreneur
___
D monopoly
___
A profit
A. the difference between the
amount of money used to
operate a business and the
amount of money a business
takes in
B. a condition that exists because
society does not have all the
resources to produce all the
goods and services that
everyone wants
C. a person who takes a risk to
produce goods and services in
search of profit
D. a business that controls so
much of an industry that little or
no competition exists
Checking for Understanding
3. Identify communism, socialism, capitalism,
free enterprise system.
Communism is an economic system in which the central
government directs all major economic decisions.
Socialism is an economic system in which the
government owns the basic means of production,
distributes the products and wages, and provides social
services such as health care and welfare.
Capitalism is an economic system providing free choice
and individual incentive for workers, investors,
consumers, and business enterprises.
A free enterprise system is an economic system based
on private ownership of the means of production and on
individual economic freedom.
Checking for Understanding
4. What are the three forms of economic
organization that have emerged in the world?
Communism, socialism, and capitalism are the
three forms of economic organization that have
emerged in the world.
Checking for Understanding
5. How has the U.S. government played a
growing role in the nation’s economy since
the late 1800s?
It has taken responsibility for the well-being of
individuals and for the financial condition of the
nation. It has assumed increasing responsibility
for social policies.
Critical Thinking
6. Making Inferences How does the free market
system promote freedom of choice for
consumers in the United States?
Consumers are free to choose what products
they buy. Consumers may choose from a variety
of sellers and products.
Free Enterprise One of the issues
debated by advocates of a planned
economy and those who support a free
market economy is whether there can be
democratic freedoms such as freedom
of speech without having economic
freedom. Write an essay explaining the
connection between economic freedom
and civil liberties.