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Section 1-Main Idea
Guide to Reading
Big Idea
An economic system is the way a society organizes the production and consumption of goods and services.
Section 1
Goods and Services
Four factors of production are necessary to produce goods and services.
Section 1
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
Section 1
• 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
Goods and Services (cont.)
• Capital goods are the result of production
Section 1
– Entrepreneurs: people who start new businesses
• Good entrepreneurs are innovative
Goods and Services (cont.)
Section 1
Gross Domestic Product
GDP is the total value of all the final goods and services produced in a country in one year.
Section 1
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
Section 1
• 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
Gross Domestic Product (cont.)
Measuring GDP
Section 1
• Net domestic product also measures the economy.
– Subtracts production caused by depreciation from GDP
Gross Domestic Product (cont.)
Section 2-Main Idea
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.
Section 2
Economic Sectors and Circular Flow
Resources, goods and services, and money flow in a circular motion among several sectors.
Section 2
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
Section 2
– Business sector
• Sells goods and services in product markets
• Uses consumer payments to buy more goods for products
• Smaller than consumer sector
Economic Sectors and Circular Flow (cont.)
Circular Flow of Economic Activity
Section 2
– 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.)
Section 2
– Foreign sector
• Both buys and sells
• Usually balances buying and selling
• Small percentage of GDP
Economic Sectors and Circular Flow (cont.)
Section 2
Promoting Economic Growth
Economic growth occurs when a nation’s total output of goods and services from all economic areas increases.
Section 2
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
Section 2
• Productivity improves through:
– Specialization
– Division of labor
– Investment in human capital
Promoting Economic Growth (cont.)
Section 2
• Economic interdependence is key to our economy
– Bad: Loss of self-sufficiency, affected by problems elsewhere
– Good: Gains in productivity
Promoting Economic Growth (cont.)
• Interdependence has trade-offs:
A. A
B. B
Section 2
Do you agree that economic interdependence is good for the economy?
A. Agree
B. Disagree
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Section 3-Main Idea
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.
Section 3
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.
Section 3
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
Section 3
• Features of Capitalism:
– Markets:
Capitalism (cont.)
• Connect parts of the economy
• Local, regional, national, or global
• Set prices
• Consumer sovereignty (“consumer is king”)
Section 3
– Economic Freedom:
• Choices in jobs and purchases
• Cost—Accepting consequences of actions
Capitalism (cont.)
– Private Property Rights:
• Freedom to own and use property
• Incentive to work, save, invest
Section 3
– Competition:
• Struggle between buyers and sellers
• Efficient production
• Higher quality products
• More satisfied customers
Capitalism (cont.)
Section 3
– 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.)
Section 3
– Voluntary exchange
• Act of freely engaging in market transactions
• Both buyer and seller benefit, but both give up something
Capitalism (cont.)
A. A
B. B
C. C
D. D
Section 3
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Who do you think benefits most from the free enterprise system?
A. Consumers
B. Business owners
C. Government
D. All the same
Section 3
History of Capitalism
Capitalism developed gradually in Europe and had a powerful influence on America’s constitutional Framers.
Section 3
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
A. A
B. B
Section 3
Do you think the principle of laissez-faire is a good way to run an economy?
A. Yes
B. No
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VS 1
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.
VS 2
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.
VS 3
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.
Figure 1
Figure 2
TIME Trans
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DFS Trans 2
DFS Trans 3
Vocab1
goods
tangible products that we use to satisfy our wants and needs
Vocab2
services
work performed by a person for someone else
Vocab3
factors of production
resources necessary to produce goods and services
Vocab4
natural resources
gifts of nature that make production possible
Vocab5
labor
human effort directed toward producing goods and services
Vocab6
capital
previously manufactured goods used to make other goods and services
Vocab7
entrepreneurs
individuals who start new businesses, introduce new products, and improve management techniques
Vocab8
Gross Domestic Product (GDP)
total dollar value of all final goods and services produced in a country during a single year
Vocab9
standard of living
the material well-being of an individual, group, or nation measured by how well their necessities and luxuries are satisfied
Vocab10
output
something produced
Vocab11
innovate
to introduce or create something new
Vocab12
market
free and willing exchange of goods and services between buyers and sellers
Vocab13
factor market
a market where productive resources are bought and sold
Vocab14
product market
a market where producers offer goods and services for sale
Vocab15
productivity
the degree to which resources are being used efficiently to produce goods and services
Vocab16
specialization
when people, businesses, regions, and/or nations concentrate on goods and services that they can produce better than anyone else
Vocab17
division of labor
the breaking down of a job into separate, smaller tasks to be performed individually
Vocab18
economic interdependence
a reliance on others, as they rely on you, to provide goods and services to be consumed
Vocab19
sector
a segment or distinct part
Vocab20
consume
to use up
Vocab21
input
to contribute an idea or opinion ; to enter data
Vocab22
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
Vocab23
free enterprise
economic system in which individuals and businesses are allowed to compete for profit with a minimum of government interference
Vocab24
consumer sovereignty
the role of consumer as the ruler of the market, determining what products will be produced
Vocab25
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
Vocab26
competition
the struggle that goes on between buyers and sellers to get the best products at the lowest prices
Vocab27
profit
the money a business receives for its products or services over and above its costs
Vocab28
profit motive
the driving force that encourages individuals and organizations to improve their material well-being
Vocab29
voluntary exchange
the act of buyers and sellers freely and willingly engaging in market transactions
Vocab30
laissez-faire economics
economics philosophy where government should not interfere in the marketplace
Vocab31
accumulate
to increase in quantity or size
Vocab32
dispose
to throw away or discard
Vocab33
incentive
reward offered to try to persuade people to take certain economic actions
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