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Chapter Introduction
Section 1:
Economic
Systems
Section 2:
Evaluating
Economic
Performance
Section 3:
American Free
Enterprise
Visual Summary
Chapter Menu

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.
Chapter Intro 1

Economic systems shape relationships in society.
Chapter Intro 2

Chapter Intro-End

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.
Section 1-Preview

Content Vocabulary
• economic system • market economy
• traditional economy • market
• socialism
• communism
• command economy
• capitalism
• mixed economy
Academic Vocabulary
• stagnation
• allocate
• emphasizing
Section 1-Key Terms

Are you familiar with the similarities and differences between a market economy and a command economy?
A.
Yes
B.
No
C.
Somewhat
A. A
0%
B. B
C. C
0% 0%
A B C
Section 1

• 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
Section 1

(cont.)
• Most economies combine elements of the three.
Comparing Economic Systems
Section 1

Traditional societies use ritual, habit, or customs to answer the basic questions of
WHAT, HOW, and FOR WHOM to produce.
Section 1

(cont.)
• A traditional economy —use of scarce resources and economic activity is based on habit or custom.
Section 1

(cont.)
• Advantages
– Everyone knows which role to play.
– Little uncertainty on what or how to produce.
– Customs and traditions determine who is provided for.
Section 1

(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
Section 1

Which of the following societies operate under a traditional economy?
A.
Aborigines of Australia
B.
Inuit of Canada
C.
Mbuti of central Africa
D.
All of the above
A. A
B. B
A
0%
B
D. D
0%
D
Section 1

Command economies rely on a central authority to make most of the economic decisions.
Section 1

(cont.)
• A central authority makes the major decisions in a command economy .
Section 1

(cont.)
• Advantages
– Can change direction drastically through emphasizing/allocation
– Health and public services available to everyone at little or no cost
Section 1

(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.
Section 1

(cont.)
– Severely limits private property rights
– Individual freedom and initiative are limited.
Section 1

Which is a disadvantage of a command economy?
A.
Large decision-making body needed
B.
Health and public services available to everyone
C.
Can change from a rural society to an industrial nation in a few decades
A
A. A
B. B
C. C
0%
B
0%
C
Section 1

In a market economy, consumers and businesses jointly answer the questions of WHAT, HOW, and FOR
WHOM to produce.
Section 1

(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 .
Section 1

(cont.)
• Capitalism means that the factors of production are privately owned.
Section 1

(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
Section 1

(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
Section 1

In which of the following areas do you think government needs to increase its presence?
A.
National defense
B.
Environmental protection
C.
Care for elderly and disabled
A. A
B. B
0%
A B C
Section 1

Most economies in the world today feature some mix of traditional, command, and market economies.
Section 1

(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
Section 1

(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
Section 1

(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.
Section 1

(cont.)
• Disadvantages
– More services means higher costs for citizens overall
– In socialist countries, availability of services may be limited or quality deteriorates over time.
Section 1

What is the main advantage of a mixed economy?
A.
Ownership and control by government
B.
More services are provided at a higher cost to citizens.
C.
Provides assistance to people otherwise left out
A. A
A
B. B
0%
C. C
0%
B
0%
C
Section 1

Section 1-End

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.
Section 2-Preview

Content Vocabulary
• minimum wage
• Social
Security
• inflation
• fixed income
Academic Vocabulary
• adverse • accommodate
Section 2-Key Terms

What happens when our economic system fails to achieve its goals?
A.
Society demands laws to modify the system until needs are met.
B.
C.
D.
The government collapses.
A command society results.
Inflation occurs.
A. A
B. B
A B D. D
0%
C
0%
D
Section 2

Americans share several major economic and social goals.
Section 2

(cont.)
• In the United States, there are seven major economic and social goals:
– Economic freedom
– Economic efficiency
– Economic equity
• The minimum wage was established on a national level.
• Many states established lemon laws.
Section 2

(cont.)
– Economic security
• Social Security was established for disabled or retired beneficiaries.
– Full employment
Section 2

(cont.)
– Price stability
• Inflation makes paying bills difficult for individuals on a fixed income .
• High rates of inflation discourage business activity.
– Economic growth
Section 2

(cont.)
• As our society evolves, more goals may become important to us.
Section 2

Do you think the current list of seven goals is enough?
A.
Yes
B.
No
A
0%
A. A
B. B
0%
B
Section 2

Conflicts among goals can be solved by comparing the cost of a goal to its benefit.
Section 2

(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.
Section 2

(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.
Section 2

Do you support the preservation of endangered species such as the
California Channel Islands fox?
A.
Completely
B.
Somewhat
C.
Not at all
A. A
B. B
0% 0%
A B C
Section 2

Section 2-End

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.
Section 3-Preview

Content Vocabulary
• free enterprise • profit
• voluntary • profit motive exchange
• private property rights
• competition
• consumer sovereignty
Academic Vocabulary
• incentive
• catalyst
• regulator
• mixed or modified free enterprise economy
Section 3-Key Terms

Can you name any countries that operate a free enterprise economy?
A.
Yes
B.
No
A
0%
A. A
B. B
0%
B
Section 3

• In many parts of the world, capitalism has become the economic system of 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
Section 3

(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
Section 3

The American economy incorporates the main characteristics of a free enterprise economy.
Section 3

(cont.)
• There are five major characteristics of a free enterprise economy:
– Economic freedom
– Voluntary exchange
Characteristics of Free Enterprise Capitalism
Section 3

(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
Section 3

What is largely responsible for the growth of a free enterprise system?
A.
Competition
B.
Profit motive
C.
Voluntary exchange
0%
A. A
B. B
0%
A B C
Section 3

Entrepreneurs are the driving force of the free enterprise system.
Section 3

(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
Section 3

(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
Section 3

(cont.)
– More production
– Higher quality
– Lower prices for consumers
Profiles in Economics:
Tony Hawk
Section 3

Why might an entrepreneur fail?
A.
Not enough capital
B.
Poor product or service
C.
Not aware of competition
D.
All of the above
A. A
B. B
A
0% 0%
C
0%
D
Section 3

The economy in the United
States adapts to consumers’ wants.
Section 3

(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.
Section 3

(cont.)
• The phrase “the customer is always right” recognizes consumer sovereignty .
• Consumers are always looking for new ideas and products.
Section 3

Do you believe that “the customer is always right”?
A.
Always
B.
Sometimes
C.
Never
0%
A. A
B. B
0%
A B C
Section 3

The economic role of the U.S. government is decided by its citizens.
Section 3

(cont.)
• The role of government stems from the desires, goals, and aspirations of its citizens.
Section 3

(cont.)
• Government has become a
– Protector
– Provider
– Regulator
– Consumer
Section 3

(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 .
Section 3

(cont.)
• Some people prefer to have no government involvement in the economy — which is not possible.
• Services, like national defense and a system of laws and justice, cannot be supplied by the private sector alone.
Section 3

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
B.
C.
Sometimes
Never
A. A
B. B
C. C
0% 0% 0%
A B C
Section 3

Section 3-End

Economic Systems Most countries have a mix of three different types of economic systems.
VS 1

Economic and Social Goals In the United States, we share several economic and social goals.
VS 2

Free Enterprise The U.S. economic system is based on the free enterprise system and is characterized by competition and private ownership of resources.
VS 3

VS-End

Figure 1

Figure 2

Figure 3

(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
Profile

Concepts Trans

DFS Trans 1

DFS Trans 2

DFS Trans 3

organized way in which a society provides for the wants and needs of its people
Vocab1

economic system in which the allocation of scarce resources and other economic activities are based on ritual, habit, or custom
Vocab2

economic system characterized by a central authority that makes most of the major economic decisions
Vocab3

economic system in which supply, demand, and the price system help people make decisions and allocate resources
Vocab4

meeting place or mechanism that allows buyers and sellers to come together
Vocab5

economic system in which private citizens own and use the factors of production in order to generate profits
Vocab6

economic system that has some combination of traditional, command, and market economies
Vocab7

political and economic system in which the government owns and controls some factors of production
Vocab8

economic and political system in which all factors of production are collectively owned and controlled by the state
Vocab9

lack of movement
Vocab10

to assign
Vocab11

stressing
Vocab12

lowest wage that can be paid to most workers
Vocab13

federal program of disability and retirement benefits that covers most working people
Vocab14

rise in the general level of prices
Vocab15

income that does not increase even though prices go up
Vocab16

unfavorable or harmful
Vocab17

to allow for
Vocab18

capitalistic economy in which competition is allowed to flourish with a minimum of government interference
Vocab19

act of buyers and sellers freely and willingly engaging in market transactions
Vocab20

fundamental feature of capitalism that allows individuals to own and control their possessions as they wish
Vocab21

extent to which persons or organizations are better off financially at the end of a period than they were at the beginning
Vocab22

incentive that encourages people and organizations to improve their financial and material well-being
Vocab23

the struggle among sellers to attract consumers
Vocab24

role of consumer as ruler of the market when determining the types of goods and services produced
Vocab25

economy where people carry on their economic affairs freely but are subject to some government intervention and regulation
Vocab26

something that motivates
Vocab27

something that stimulates activity among people or forces
Vocab28

someone or something that controls activities
Vocab29

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