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Chapter Introduction
Section 1: Economic Systems
Section 2: Evaluating Economic Performance
Section 3: American Free Enterprise
Visual Summary
Chapter Intro 1
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 2
Every society has an economic system to allocate goods and services.
Section 1-Preview
Section PreviewIn 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-Key Terms
Content Vocabulary• economic system
• traditional economy
• command economy
• market economy
• market
• capitalism
• mixed economy
Academic Vocabulary• stagnation
• allocate
• emphasizing
• socialism
• communism
A. AB. BC. C
Section 1
Are you familiar with the similarities and differences between a market economy and a command economy?
A. Yes
B. No
C. Somewhat
A B C
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Section 1
Economic Systems• All societies use an economic system to
provide for needs and wants of their people.
– Traditional
– Command
– Market
• Three major economic systems exist:
Comparing Economic Systems
Section 1
Economic Systems (cont.)
• Most economies combine elements of the three.
Comparing Economic Systems
Section 1
Traditional EconomiesTraditional societies use ritual, habit, or customs to answer the basic questions of WHAT, HOW, and FOR WHOM to produce.
Section 1
• A traditional economy—use of scarce resources and economic activity is based on habit or custom.
Traditional Economies (cont.)
Section 1
• 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.)
Section 1
• 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
Traditional Economies (cont.)
A. AB. BC. CD. D
Section 1
A B C D
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Which of the following societies operate under a traditional economy?
A. Australian Aborigines
B. Botswana
C. Mbuti
D. All of the above
Section 1
Command Economies Command economies rely on a central authority to make most of the economic decisions.
Section 1
• A central authority makes the major decisions in a command economy.
Command Economies (cont.)
Section 1
• Advantages
– Can change direction drastically through emphasizing/allocation
– Health and public services available to everyone at little or no cost
Command Economies (cont.)
Section 1
• 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.)
Section 1
– Severely limits private property rights
– Individual freedom and initiative are limited.
Command Economies (cont.)
A. AB. BC. C
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 B C
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Section 1
Market Economies In a market economy, consumers and businesses jointly answer the questions of WHAT, HOW, and FOR WHOM to produce.
Section 1
• 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.)
Section 1
• 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.)
Section 1
• Disadvantages
– Not everyone is provided for
– May not provide enough of some basic goods and services
– High degree of uncertainty for workers and employers
Market Economies (cont.)
A. AB. BC. C
Section 1
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 B C
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Section 1
Mixed Economies Most economies in the world today feature some mix of traditional, command, and market economies.
Section 1
• 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.
Mixed Economies (cont.)
The Spectrum of Mixed Economies
Section 1
• The type of political system in a mixed economy is less important than the way basic economic decisions are made.
Mixed Economies (cont.)
The Spectrum of Mixed Economies
Section 1
• 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.)
Section 1
• Disadvantages
– More services mean higher costs for citizens overall.
– In socialist countries, availability of services may be limited or quality deteriorates over time.
Mixed Economies (cont.)
A. AB. BC. C
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 B C
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Section 2-Preview
Section PreviewIn 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-Key Terms
Content Vocabulary• minimum
wage
• Social Security
• inflation
• fixed income
Academic Vocabulary• adverse • accommodate
A. AB. BC. CD. D
Section 2
A B C D
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What happens when our economic system fails to achieve our goals?
A. Societies demand laws to modify system until needs are met.
B. The government collapses.
C. A command society results.
D. Inflation occurs.
Section 2
Economic and Social Goals Americans share several major economic and social goals.
Section 2
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.
Section 2
Economic and Social Goals (cont.)
– Economic security
• Social Security was established for disabled or retired beneficiaries.
– Full employment
Section 2
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
Section 2
• As our society evolves, more goals may become important to us.
Economic and Social Goals (cont.)
A. AB. B
Section 2
Do you think the current list of seven goals is enough?
A. Yes
B. No
A B
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Section 2
Resolving Trade-Offs Among Goals Conflicts among goals can be solved by comparing the cost of a goal to its benefit.
Section 2
• 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.)
Section 2
• 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.
Resolving Trade-Offs Among Goals (cont.)
A. AB. BC. C
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 B C
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Section 3-Preview
Section PreviewIn 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-Key Terms
Content Vocabulary• free enterprise
• voluntary exchange
• private property rights
• profit
• profit motive
• competition
• consumer sovereignty
Academic Vocabulary• incentive
• catalyst
• regulator
• mixed or modified free enterprise economy
A. AB. B
Section 3
Can you name any countries that operate a free enterprise economy?
A. Yes
B. No
A B
0%0%
Section 3
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
Section 3
• 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.
American Free Enterprise (cont.)
Characteristics of Free Enterprise Capitalism
Section 3
Characteristics of Free Enterprise Capitalism
The American economy incorporates the main characteristics of a free enterprise economy.
Section 3
• There are five major characteristics of a free enterprise economy:
– Economic freedom
– Voluntary exchange
Characteristics of Free Enterprise Capitalism (cont.)
Characteristics of Free Enterprise Capitalism
Section 3
– Profit motive
• People are free to take risks to earn a profit.
– Competition
Characteristics of Free Enterprise Capitalism (cont.)
Characteristics of Free Enterprise Capitalism
– Private property rights
• Private property gives individuals incentive to work, save, and invest.
A. AB. BC. C
Section 3
What is largely responsible for the growth of a free enterprise system?
A. Competition
B. Profit motive
C. Voluntary exchange
A B C
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Section 3
The Role of the Entrepreneur Entrepreneurs are the driving force of the free enterprise system.
Section 3
• 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.)
Section 3
• 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
The Role of the Entrepreneur (cont.)
– New products
– Greater competition
Section 3
– More production
The Role of the Entrepreneur (cont.)
– Higher quality
– Lower prices for consumers
Profiles in Economics:Tony Hawk
A. AB. BC. CD. D
Section 3
A B C D
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Why might an entrepreneur fail?
A. Not enough capital
B. Poor product or service
C. Not aware of competition
D. All of the above
Section 3
The Role of the Consumer The economy in the United States adapts to consumers’ wants.
Section 3
• 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.)
Section 3
• The phrase “the customer is always right” recognizes consumer sovereignty.
• Consumers are always looking for new ideas and products.
The Role of the Consumer (cont.)
A. AB. BC. C
Section 3
Do you believe that “the customer is always right”?
A. Always
B. Sometimes
C. Never
A B C
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Section 3
The Role of the Government The economic role of the U.S. government is decided by its citizens.
Section 3
• The role of government stems from the desires, goals, and aspirations of its citizens.
The Role of the Government (cont.)
Section 3
• Government has become
– A protector
– Provider
– Regulator
– Consumer
The Role of the Government (cont.)
Section 3
• 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.)
Section 3
• 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.
The Role of the Government (cont.)
A. AB. BC. C
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. Sometimes
C. Never
A B C
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Economic Systems Most countries have a mix of three different types of economic systems.
VS 1
VS 2
Economic and Social Goals In the United States, we share several economic and social goals.
VS 3
Free Enterprise The U.S. economic system is based on the free enterprise system and is characterized by competition and private ownership of resources.
Figure 1
Figure 2
Figure 3
Profile
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
Concepts Trans
DFS Trans 1
DFS Trans 2
DFS Trans 3
Vocab1
economic system organized way in which a society provides for the wants and needs of its people
Vocab2
traditional economy economic system in which the allocation of scarce resources and other economic activities are based on ritual, habit, or custom
Vocab3
command economy economic system characterized with a central authority that makes most of the major economic decisions
Vocab4
market economy economic system in which supply, demand, and the price system help people make decisions and allocate resources
Vocab5
market meeting place or mechanism that allows buyers and sellers to come together
Vocab6
capitalism economic system in which private citizens own and use the factors of production in order to generate profits
Vocab7
mixed economyeconomic system that has some combination of traditional, command, and market economies
Vocab8
socialismpolitical and economic system in which the government owns and controls some factors of production
Vocab9
communismeconomic and political system in which all factors of production are collectively owned and controlled by the state
Vocab10
stagnation lack of movement
Vocab11
allocate to assign
Vocab12
emphasizing stressing
Vocab13
minimum wagelowest wage that can be paid to most workers
Vocab14
Social Securityfederal program of disability and retirement benefits that covers most working people
Vocab15
inflationrise in the general level of prices
Vocab16
fixed incomeincome that does not increase even though prices go up
Vocab17
adverse unfavorable or harmful
Vocab18
accommodate to allow for
Vocab19
free enterprisecapitalistic economy in which competition is allowed to flourish with a minimum of government interference
Vocab20
voluntary exchangeact of buyers and sellers freely and willingly engaging in market transactions
Vocab21
private property rightsfundamental feature of capitalism that allows individuals to own and control their possessions as they wish
Vocab22
profitextent to which persons or organizations are better off financially at the end of a period than they were at the beginning
Vocab23
profit motiveincentive that encourages people and organizations to improve their financial and material well-being
Vocab24
competitionthe struggle among sellers to attract consumers
Vocab25
consumer sovereigntyrole of consumer as ruler of the market when determining the types of goods and services produced
Vocab26
mixed or modified free enterprise economyeconomy where people carry on their economic affairs freely but are subject to some government intervention and regulation
Vocab27
incentive something that motivates
Vocab28
catalyst something that stimulates activity among people or forces
Vocab29
regulator someone or something that controls activities
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