Chapter 2 – Economics

Four different types of economic systems
have evolved throughout history as cultures,
societies, and nations have struggled with
what to do with the factors of production…
 1) Land
 2) Labor
 3) Capital
 Cultures, societies, and nations have
placed emphasis on different goals and
priorities in their efforts to answer three
basic questions:
▪ 1) What goods and services should be
produced?
▪ 2) How should they be produced?
▪ 3) Who should get what is produced?

Traditional System

Command System

Market System

Mixed System
3 questions answered
according to tradition
 “things are done the
way they always have
been done”
 Decisions based on
customs and beliefs

 Handed down
through generations

Advantages
 You know what is
expected of you
 Ties to others
extremely strong

Disadvantages
 Change is
discouraged
 Production
inefficient

 Advantage
3 questions
 Speed which decisions are
answered by
government leadersmade
 Individual
 small group
 Central planners
 War-time changes

Disadvantage
 Lack of incentives to work
hard
 Gov’t controls the
 Lack of consumer goods
factors of
 No reason to work smartly
production
or efficiently
AKA – Capitalism
3 questions are
answered by
individuals deciding
for themselves
 “markets” –
voluntary exchange
(far and wide!)



The circular flow of
economic activity
explains how the
market system
works…
 Explains the
exchange of good
and services between
producers and
consumers…
 Advantages
 People have freedoms
 Competition provides consumers with
choices of goods
 Efficient cost system
 Disadvantages
 Concern over those who cannot work
▪ Too young, too old, too sick

Combines SOME government involvement
and regulation with aspects of the free
market…

Individuals have the ability to make choices,
but governments regulate and control certain
aspects of that economy…



The American
economy is considered
a mixed market.
aspects of
governmental control
in a free market
system.
6 key principles that
drive the American
economy and let it
thrive…
1) Limited role of
Gov’t
 2) Freedom of
Enterprise
 3) Freedom of
Choice
 4) Profit incentive
 5) Private Property
 6) Competition


Adam Smith and “Wealth 
of Nations” (1776) capitalism and “laissezfaire”

Ind. left on their own
would make decisions to
benefit their own selfinterest…
The U.S. system of
Capitalism = freedom +
limits by the gov’t

Because they are
making decisions
based on their own
self-interest… they
would use resources
efficiently!


 Zoning regulations
Stimulates
entrepreneurship!
limit the U.S. free
enterprise…
 Failure or success is
possible
Individuals have the
 Should we have
freedom to do what they zoning? Does it cut
please with factors of
back on free
production!
enterprise?
 Cars? Start an auto-shop!
 Food? Open a restaurant!

The opposite of free enterprise…

Concerns buyers, NOT sellers!

Buyers make decisions on what should be
produced…
 This is done through the purchases they make
 Producers recognize these purchases and adjust
accordingly

In the U.S., because of the economic system
present, ind. are motivated to make a profit!

Profit motivates entrepreneurs to establish
new technology and better products to keep
customers…
 $ left after costs of production are paid

Probably the most important aspect of the
U.S. economic system…

You are free to buy whatever you want – to
make it your own…

You can decide what you want to do with
your private property…
Lure of profits
 Leads to efficient
encourages
use of resources
competition…
 Prices low to attract
 Rivalry among
buyers
producers
 High enough to make
creates/forces efficiency profit
in the markets…

 Lower prices
 Better quality

Freedom
 Allow each member of society to make
choices

Efficiency
 Use limited resources wisely

Security
 Government programs protect us from
certain risks

Stability
 Reduce extreme ups and downs in standard
of living
▪ Material well-being of individual, group, or
nation

Growth
 Producing increasing # of goods and
services over long term

Equity
 Economic system should be fair and just