Unit 8.2 Types of Economies

Notes- Answers

Complete the Structured Notes as you view the Power Point.

Essential Standards: CE.E1.2 Analyze a market in terms of

economic characteristics, the roles they play in decision-making and the importance of each role

CE.E1.4 Analyze the ways in which incentives and profits influence what is produced and distributed in a market system

CE.E1.5 Compare how various market structures affect decisions made in a market economy

Standards:

Unit 8.2: Chapter 19 The American

Economy Section 2 Economic Activity

Circular Flow of Economic Activity:

Circular Flow- Shows how economic decisions in a market economy are made by Households, Businesses, and the Government (and in foreign markets)

Household (Consumer) Sector- the people who earn and spend money

Business Sector- where people earn and spend money

Government Sector- federal, state, and local governments

Foreign Sector- all countries in the world

Chapter 19: The American Economy Standards: 1.2,1.4: Section 2

Factor Market

Economic Interdependence of the Circular Flow: Households- provide labor and buy goods and

services with money they earn from businesses and the government

Businesses- produce goods and services and buy goods and services to help run their business with money from consumer purchases and government subsidies

Government- produces goods and services, buys goods and services, with money collected in taxes and fees from households and businesses

Foreign- Households, Businesses, and the Government buy and sell from countries around the world

Chapter 19: The American Economy Standards: 1.2,1.4: Section 2

Product and Factor markets: Factor Market- Where the factors of

production are used to make products Where producers earn a profit

Product Market- Where final goods and services are sold

Computers, shoes, pencils, hair, clothes, iPods, phones, etc.

Business use money earned to buy more resources to make more products

Chapter 19: The American Economy Standards: 1.2,1.4: Section 2

Factor Market / Product Market

Gross Domestic Product (GDP) - a measure of how many goods and services are produced in a year to indicate how the economy is doing

Chapter 19: The American Economy Standards: 1.2,1.4: Section 2

Global Interdependence: Our country relies on other countries to provide us with goods and services and other countries rely on us to provide them with goods and services- Countries around the world rely on each other to provide the goods and services they need

Events in one country or another part of the world can have a dramatic impact on trade in other parts of the world

Chapter 19: The American Economy Standards: 1.2,1.4: Section 2

Poll How can a tornado in China possibly hurt

our economy?

Unit 8.2: Chapter 19 The American

Economy Section 3 Capitalism and Free

Enterprise

Capitalism: The economic system of the United States is

Capitalism In Capitalism private citizens own and use

the factors of production to make a profit In Capitalism the economy operates with

free markets and private ownership Free Enterprise: In the Unites States’ economy competition is

allowed with little government interference

Chapter 19: The American Economy Standards: 1.2,1.4: Section 3

Poll Give an example of one way the

government is involved our businesses.

6 Features of Capitalism: 1. Markets 2. Economic Freedom 3. Private Property Rights 4. Competition 5. Profit Motive 6. Voluntary Exchange

Chapter 19: The American Economy Standards: 1.2,1.4: Section 3

Markets: Places where prices are determined and buying and selling takes place (exchanges)◦ Review Chart on page 522◦ Consumers and businesses interact in product

and factor markets◦ Your labor is sold in the factor market◦ Goods and services are purchased in the product

market◦ The consumer determines what will and will not

be produced based on if it is purchased or not “Consumer Sovereignty”

Chapter 19: The American Economy Standards: 1.2,1.4: Section 3

Markets

Economic Freedom: We are free to make our own economic choices◦ Where we shop, what we buy, what we produce,

where we work◦ We must live with the consequences of our choices

Private Property Rights: We are free to do whatever we want with our own property as long as we don’t bother other people’s rights◦ People usually take better care of things they own

Chapter 19: The American Economy Standards: 1.2,1.4: Section 3

Competition: Struggle between buyers and sellers to get the best products at the best possible price◦ Between sellers it keeps cost of production low

and quality high◦ Forces least efficient producers out of business◦ Makes for efficient production, higher quality

products, and more satisfied customers

Chapter 19: The American Economy Standards: 1.2,1.4: Section 3

Poll How does competition keep prices low?

Profit Motive: Drives people to improve their financial status◦ People are allowed to make as much money as

they can in business◦ Profit is the money left over after all expenses

have been paid Voluntary Exchange: Buyers and sellers

freely participating in market transactions◦ Buyers and sellers benefit in the exchange

Chapter 19: The American Economy Standards: 1.2,1.4: Section 3

Adam Smith- wrote book “The Wealth of Nations”- described the basic principles of a free market economy

Adam Smith believed that people would work for their own self interest if left on their own without government interference

Their self interest would be guided by an invisible hand that would encourage them to use resources efficiently

Chapter 19: The American Economy Standards: 1.2,1.4: Section 3

Invisible Hand

Laissez-faire Economics- a French term meaning the government should not interfere in business- government’s role is limited to actions needed to ensure free competition in the marketplace

Chapter 19: The American Economy Standards: 1.2,1.4: Section 3

Unit 8.2: Chapter 26 Comparing

Economic Systems Section 2

Economic Systems

Market Economies◦ All societies must ask and answer the basic

economic questions What to produce How to produce For whom to produce

◦ The answers to these questions determine the type of economic system a country will have

◦ Market Economy-decisions are based on supply and demand

◦ Market Economy is also known as Capitalism

Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2

Poll What is another name for a Market

Economy?

Characteristics of a Market Economy◦ Private citizens (not the government) own the

factors of production◦ Businesses answer the questions of What? How? For

Who?◦ Businesses answer these questions based on their

desire to make a profit◦ Consumers decide what to buy◦ Supply and demand interact to set prices◦ Producers and consumers make their own decisions◦ All the people in a market economy make decisions-

this makes it look like the economy runs by itself because no one coordinates the decisions

Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2

◦ The government makes sure markets are competitive◦ Consumers benefit from competition◦ The government makes sure there are enough

businesses to ensure competition by regulating business◦ Externalities- unintended side effects that have

influence on a third party◦ Government influence externalities

Laws against pollution that can help all people Fund scientific research that can lead to new

discoveries for everyone◦ Per Capita GDP is high

Total GDP divided by the country’s population

Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2

Command Economies Characteristics of a Command

Economy◦ Command Economy is the opposite of a Market

EconomyEconomic systems are different than political systems

The United States has a democratic political system and a market economic system

Great Britain has a democratic political system and socialism as their economic system

Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2

Poll Who makes all economic decisions in a

Command Economy?

◦ In a pure command economy individuals have little (if any) influence over how the economy runs

◦ Major economic decisions are made by the government

◦ The government gives producers commands◦ Socialism- the government owns the factors of

production◦ Communism- all people are equal and everyone

shares ownership of the means of production ◦ Karl Marx was a socialist- believed population of

industrialized nations is divided into owners (the haves-bourgeoisie) and workers (the have nots- proletariat)

Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2

◦ Marx predicted a violent revolution from the workers against the owners

◦ Marx believed socialism would develop into communism

◦ Communism never developed into the equality Marx had envisioned

◦ In a command economy the government answers all the “Who, What, How” questions

◦ In a command economy the government sets workers wages and product prices

◦ Command Economies have a lower Per capita GDP than Market Economies

◦ Examples- Cuba and North Korea

Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2

Mixed Economies◦Mixed Economy- Economic system with

elements from more than one type of system ◦ Most countries have a form of mixed economy◦ United States has Capitalism with Free

Enterprise- people own the factors of production but the government keeps competition free and fair and protect s the public interest

Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2

Poll How does the United States have a Mixed

Economy?

◦ The government provides services to businesses and consumers Federal and State maintained roads and

highways help transport goods

◦ Government agencies produce and distribute goods and services to consumers

Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2

Direct Role- government provides a good or service that competes with a private business Postal service vs. UPS or FedEx

Indirect Role- government acts as an umpire to make sure the economy runs smoothly and efficiently Regulation of public utilities (ex. water or electricity)

Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 2

Economy Definition ReminderCapitalism 

Economic system in which private citizens own and use the factors of production in order to make a profit

United States

Traditional Economy

System in which the decision of what, how and for whom things are produced are made by custom or habit

 

Command Economy

Economic system in which the government owns the factors of production and makes all economic decisions- distribution based on equality

Socialism and Communism

Socialism Economic system where society controls all economic decisions- not individual people like in Capitalism- (In Socialism Government is part of society)

Great Britain

Communism In Karl Marx’s book “The Communist Manifesto” he described a classless society where all people owned all property equally and government was not needed

Marx’s idea did not happen- Communism became a system where the government owned all property and makes all decisions- Cuba

Market Economy Economic system in which factors of production are privately owned with very little government control- supply determined by demand- prices determined by competition

 

Mixed Economy Economic system with elements from more than one type of system

United States has Capitalism with Free Enterprise- people own factors but government has a limited role to supervise

Poll Did Communism work out the way Marx had

wanted?

Unit 8.2: Chapter 26 Comparing Economic Systems Section 3

Economies in Transition

Poll Identify a country that has a Socialist

economy.

Changing Economies◦ Many countries are changing their economic

systems to try to improve the economy of their country

Failure of Command Economies◦ In the late 1980’s command economies were

unable to achieve the same economic growth of market economies

◦ In Eastern Europe the economic changes occurred with political changes as well- many countries moved toward democracy

Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 3

Poll Who owns the factors of production in

Capitalism?

Russia◦ 1991 the Soviet Union collapsed ◦ Communist leaders could no longer keep the

economy going◦ Russia was the largest country to come out of the

breakup of the Soviet Union◦ The problem with the changeover was that people

had to learn how to operate a market economy How to own a company How to make supply and demand decisions How to operate a stock market

◦ The change is a slow process

Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 3

China◦ China began to introduce a market economy to

compete with other market economies◦ China’s economy has grown rapidly since the

late 1990’s Problems: farmers can’t compete

with cheaper foreign food, very high unemployment

Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 3

Developing Countries Economic Characteristics

◦ Only 35 of 200 countries in the world are considered developed nations United States, Great Britain, Spain, Japan,

Australia, Republic of China◦Developing Country- country whose average

per capita income is only a fraction of that of a more industrialized country

◦Traditional Economy- System where economic decisions are based on custom or habit

Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 3

Problems Developing Countries Face◦ High population growth- when population grows faster

than GDP each person has a smaller share of what is produced

◦ Rapid population growth causes many problems Lack of food Lack of housing

◦ Lack of natural resources◦ Lack of access to ocean trade routes◦ War◦ Debt- many countries borrow money to increase economic

growth but cannot pay back the debt Government corruption will slow the

development of a country

Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 3

Growth and Development◦ Developing countries are responsible for their

own economic development◦ The World Bank suggested developing countries

invest more in people Education Family planning Nutrition

Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 3

Poll How can we invest in developing countries

to help them grow?

◦The World Bank suggested that competitive markets- not government officials- should make the “What, How, and Whom” decisions

◦ It is better for developing countries to open their trade with other countries than to limit trade with barriers and tariffs

Chapter 26: Comparing Economic Systems Standards: 1.2,1.4, 1.5: Section 3