Chapter Introduction
Section 1: Economic
Resources
Section 2: Economic
Activity
Section 3: Capitalism and
Free Enterprise
Visual Summary
An economic system is a set
of rules that governs what
goods and services to
produce, how to produce
them, and for whom they are
produced. In this chapter, you
will learn how the economic
system of the United States
answers these questions.
Section 1:
Economic Resources
An economic system is the
way a society organizes the
production and
consumption of goods and
services. Four different key
factors of production are
necessary to produce goods
and services.
Section 2:
Economic Activity
The basis of the market
economy is voluntary
exchange. In the American
economy, the exchange
usually involves money in
return for a good or service.
Economic growth occurs when a
nation’s total output of goods
and services, flowing in a
circular motion among several
sectors, increases.
Section 3:
Capitalism and Free
Enterprise
Free enterprise is the
freedom of individuals and
businesses to operate and
compete with a minimum of
government interference or
regulation. The American
economic system is the most
successful in the history of
the world.
Guide to Reading
Big Idea
An economic system is the way a
society organizes the production and
consumption of goods and services.
Guide to Reading
Content Vocabulary
• goods
• capital
• services
• entrepreneur
• factors of
production
• Gross Domestic
Product (GDP)
• natural
resources
• standard of
living
• labor
Guide to Reading
Academic Vocabulary
• output
• innovate
Do you agree that people who do not
take risks will never succeed in
business?
A. Agree
B. Disagree
A. A
B. B
0%
B
A
0%
Goods and Services
Four factors of production are
necessary to produce goods and
services.
Goods and Services (cont.)
• The production of goods and services is
controlled by four factors of production.
• Output, or things produced, comes in
two forms:
– Goods: physical things, such as books
– Services: work for someone else, such
as a haircut
Goods and Services (cont.)
• There are four factors of production:
– Natural resources: “gifts of nature”
transformed for use (ex: trees to lumber)
– Labor: human work
– Capital: tools, machinery, and buildings
used to make other products
• Capital goods are the result of
production
Goods and Services (cont.)
– Entrepreneurs: people who start new
businesses
• Good entrepreneurs are innovative
Which of the following do you think is
the most important for the economy?
A. Natural resources
B. Labor
C. Capital
D. Entrepreneurs
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
Gross Domestic Product
GDP is the total value of all the final
goods and services produced in a
country in one year.
Gross Domestic Product (cont.)
• The Gross Domestic Product (GDP) is
one way to measure the economy.
• GDP totals final goods and services
produced in one year.
– Goods that go into making or doing
something are not counted
– Goods that are used up also do
not count
Gross Domestic Product (cont.)
• Measuring GDP:
– Finds relative worth of goods
– Helps measure standard of living
– Measures quantity, not quality
– Does not account for depreciation, or
loss of value over time
Measuring GDP
Gross Domestic Product (cont.)
• Net domestic product also measures the
economy.
– Subtracts production caused by
depreciation from GDP
Guide to Reading
Big Idea
The basis of the market economy is
voluntary exchange. In the American
economy, the exchange usually
involves money in return for a good
or service.
Guide to Reading
Content Vocabulary
• market
• specialization
• factor market
• division of labor
• product
market
• economic
interdependence
• productivity
Guide to Reading
Academic Vocabulary
• sector
• consume
• input
Have you ever had a job to earn money?
A. Yes
B. No
A. A
B. B
0%
B
A
0%
Economic Sectors and Circular Flow
Resources, goods and services, and
money flow in a circular motion among
several sectors.
Economic Sectors and Circular Flow
(cont.)
• An economic market is the free exchange
of products among buyers and sellers.
• Markets operate in a circular motion
between different sectors:
– Consumers:
• Earn income in factor markets
• Wages, salaries, tips, rent, interest
Economic Sectors and Circular Flow
(cont.)
– Business sector
• Sells goods and services in
product markets
• Uses consumer payments to buy more
goods for products
• Smaller than consumer sector
Circular Flow of Economic Activity
Economic Sectors and Circular Flow
(cont.)
– Government sector
• Federal, state, and local
• Purchases productive inputs
• Receives revenue from selling
services
• Purchases final goods and services
• Second largest sector of economy
Economic Sectors and Circular Flow
(cont.)
– Foreign sector
• Both buys and sells
• Usually balances buying and selling
• Small percentage of GDP
Which do you think should be the
most important sector of the
economy?
A. Consumer
B. Business
C. Government
D. Foreign
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
Promoting Economic Growth
Economic growth occurs when a
nation’s total output of goods and
services from all economic areas
increases.
Promoting Economic Growth (cont.)
• Economic growth occurs when the total
output of goods and services increases
over time.
• Productivity measures amount of output
by certain inputs.
– Rises when output goes up and input
stays the same, or output stays the
same and input goes down
– Applies to all factors of production
Promoting Economic Growth (cont.)
• Productivity improves through:
– Specialization
– Division of labor
– Investment in human capital
Promoting Economic Growth (cont.)
• Economic interdependence is key to our
economy
• Interdependence has trade-offs:
– Bad: Loss of self-sufficiency, affected by
problems elsewhere
– Good: Gains in productivity
Do you agree that economic
interdependence is good for the
economy?
A. Agree
B. Disagree
A. A
B. B
0%
B
A
0%
Guide to Reading
Big Idea
Free enterprise is the freedom of
individuals and businesses to
operate and compete with a
minimum of government interference
or regulation.
Guide to Reading
Content Vocabulary
• capitalism
• profit
• free
enterprise
• profit motive
• consumer
sovereignty
• private
property
rights
• competition
• voluntary
exchange
• laissez-faire
economics
Guide to Reading
Academic Vocabulary
• accumulate
• dispose
• incentive
Do you agree that government should
limit competition in business?
A. Agree
B. Disagree
A. A
B. B
0%
B
A
0%
Capitalism
The economic system of the United
States is known as capitalism, in which
private citizens own and use the
factors of production to seek a profit.
Capitalism (cont.)
• The economic system of the United States
is based on capitalism.
• Capitalism: free markets and private
ownership used to seek profits
• The American economy is based on
free enterprise
Capitalism (cont.)
• Features of Capitalism:
– Markets:
• Connect parts of the economy
• Local, regional, national, or global
• Set prices
• Consumer sovereignty (“consumer
is king”)
Capitalism (cont.)
– Economic Freedom:
• Choices in jobs and purchases
• Cost—Accepting consequences of
actions
– Private Property Rights:
• Freedom to own and use property
• Incentive to work, save, invest
Capitalism (cont.)
– Competition:
• Struggle between buyers and sellers
• Efficient production
• Higher quality products
• More satisfied customers
Capitalism (cont.)
– Profit Motive
• Profit is the amount left after costs
have been paid.
• Encourages improvement of own
well being
• Responsible for growth of free
enterprise system
Capitalism (cont.)
– Voluntary exchange
• Act of freely engaging in market
transactions
• Both buyer and seller benefit, but both
give up something
Who do you think benefits most from
the free enterprise system?
A. Consumers
B. Business owners
C. Government
D. All the same
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
History of Capitalism
Capitalism developed gradually in
Europe and had a powerful influence
on America’s constitutional Framers.
History of Capitalism (cont.)
• Capitalism, as developed in Europe,
greatly influenced American’s Framers.
• Adam Smith’s Wealth of Nations
– Published in 1776
– First description of basic economic
principles
– “invisible hand”
• Laissez-faire economics
Do you think the principle of
laissez-faire is a good way to
run an economy?
A. Yes
B. No
A. A
B. B
0%
B
A
0%
Economic Resources
• The four factors of
production (natural
resources, labor, capital,
and entrepreneurs)
provide the means for a
society to produce its
goods and services.
• Gross Domestic Product
(GDP) is the total value
of all the final goods and
services produced in a
country in one year.
Economic Activity
• Productivity relates to the
efficient use of resources,
and tends to go up when
workers specialize in the
things they do best.
• Resources, goods and
services, and money flow
in a circular motion among
several sectors, and
economic growth occurs
when a nation’s total
output of goods and
services increases.
Capitalism and Free Enterprise
• The economic system of
the United States is
based on capitalism and
free enterprise.
• Important characteristics
are markets, economic
freedom, competition,
private property rights,
the profit motive, and
voluntary exchange.
goods
tangible products that we use to
satisfy our wants and needs
services
work performed by a person for
someone else
factors of production
resources necessary to produce
goods and services
natural resources
gifts of nature that make production
possible
labor
human effort directed toward
producing goods and services
capital
previously manufactured goods used
to make other goods and services
entrepreneurs
individuals who start new businesses,
introduce new products, and improve
management techniques
Gross Domestic
Product (GDP)
total dollar value of all final goods and
services produced in a country during
a single year
standard of living
the material well-being of an
individual, group, or nation measured
by how well their necessities and
luxuries are satisfied
output
something produced
innovate
to introduce or create something new
market
free and willing exchange of goods
and services between buyers and
sellers
factor market
a market where productive resources
are bought and sold
product market
a market where producers offer
goods and services for sale
productivity
the degree to which resources are
being used efficiently to produce
goods and services
specialization
when people, businesses, regions,
and/or nations concentrate on goods
and services that they can produce
better than anyone else
division of labor
the breaking down of a job into
separate, smaller tasks to be
performed individually
economic interdependence
a reliance on others, as they rely on
you, to provide goods and services to
be consumed
sector
a segment or distinct part
consume
to use up
input
to contribute an idea or opinion ; to
enter data
capitalism
a system in which private citizens
own most, if not all, of the means of
production and decide how to use
them within legislated limits
free enterprise
economic system in which individuals
and businesses are allowed to
compete for profit with a minimum of
government interference
consumer sovereignty
the role of consumer as the ruler of
the market, determining what
products will be produced
private property rights
the freedom to own and use our own
property as we choose as long as we
do not interfere with the rights of
others
competition
the struggle that goes on between
buyers and sellers to get the best
products at the lowest prices
profit
the money a business receives for its
products or services over and above
its costs
profit motive
the driving force that encourages
individuals and organizations to
improve their material well-being
voluntary exchange
the act of buyers and sellers freely
and willingly engaging in market
transactions
laissez-faire economics
economics philosophy where
government should not interfere in
the marketplace
accumulate
to increase in quantity or size
dispose
to throw away or discard
incentive
reward offered to try to persuade
people to take certain economic
actions
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