Chapter 2

Economic Systems and the American Economy

Section 2-1: Economic Systems

Economic System: way in which a nation uses its resources to satisfy its people’s wants and needs

Three Basic Questions all nations have to answer (businesses too) What goods and services should be produced? How should they be produced? Who will get the goods and how will they be

distributed?

Types of Economic SystemsTraditional economy: based on habit,

customs and religious tradition -passed down for generations

Children take on the profession of their parents

Command economy (also called directed): government leaders answer the three basic questions Individuals have little economic freedom Few consumer goods are available

Market/Capital economy: individuals make the decisions Market: voluntary exchange of goods and

services between buyers and sellers

Businesses Consumers

Income Payments$ (Wages, Rent, Interest, Profit) $

(1)

Productive Resources(Labor, Land, Capital,

Management)(2)

Goods and Services

(3)

$ Consumer Expenditures $

(4)

Circular flow of economic activity: income flows continuously between business and consumers

Mixed economy: combination of three pure economic systems-all economies are really mixed

Section 2-2: Characteristics of the American Economy

Limited Role of Government Capitalism: economic system in which private

individuals own the factors of production Pure capitalism can be referred to as a laissez-faire

system Laissez-faire: a system where government

limits its interference with the economy (means to let alone)

Freedom of Enterprise Individuals can own and control the factors of

production No guarantee of success Governments place restrictions on some things

( child labor laws, special licensing, zoning laws, etc.)

Freedom of Choice Consumers decide what is produced by buying

it or not buying it (you vote for products you like)

Demand determines what is produced -If a product doesn’t sell, the company looses money

Government sets safety standards Government regulates price in some industries

(ex. utility companies)

Profit Incentive People produce goods to make a profit- money left after

costs of production are paid (ex. Wages, rent, taxes, etc)

Losses are a sign of inefficient use of resources-forces businesses to change in order to make a profit

Private Property Private property is property held by individuals or

groups Individuals control how property is used- want to make a

the best profit

Competition Competing businesses try to win customers

with lower prices or better quality goods and services

Businesses need to use resources efficiently to stay competitive (prices have to be low enough to attract buyers yet high enough to make a profit)

In the U.S., most industries have weak barriers to enter but some (ex. Becoming a doctor) are more difficult

Section 2-3: Goals of the Nation

Goals of Free Enterprise 1) Economic Freedom: allowing people to make their

own decisions on what to purchase 2) Economic Efficiency: making the best use of your

limited resources (land, labor, capital, Entrepreneurship) 3) Economic Equity: Laws regarding the economy should

be fair-everyone has the right to earn an income or to invest

4) Security: Government sets up social program to help people attain basic needs in case of hardship

CONT..

5) Economic Stability: few ups and downs in the economy

Tries to stop:• Inflation: rise in the average cost of goods and services without

an increase in wages- dollar loses value Especially hard on people with fixed incomes, retired,

lenders of money

• Deflation: average prices fall- causes unemployment- waste of economic resources

6) Economic growth: growth of the economy as technology and education increase- we are able to acquire more goods and services than previous generations

Rights and responsibilities People have the right to do what they want

within the law (enter any profession you like, work a little or a lot, buy what you want)

People have to behave responsibly in order for the system to work (support yourself and your family)

People are responsible for electing good government officials