Economic Systems and the American Economy

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Economic Systems and the American Economy

• Chapter 2

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Three Basic Economic Questions

• What should be produced?
• How should it be produced?
• For whom should it be produced?
• - All economic systems must answer these
  questions.

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Four Types of Economic Systems

• Traditional Economy
• Command Economy
• Market Economy
• Mixed Economy

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Traditional Economy

• Things are done the way they have always been
  done
• Advantage Expectations are clear
• Disadvantage Change is discouraged, production
  is inefficient
• Example Aborigines of Australia

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Command Economy

• Government, not individuals, has control over how
  economic questions are answered
• Government owns resources and distributes goods
  and services
• Advantage Ease of redistributing resources
• Disadvantage Lack of worker incentives
• Example China, North Korea

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Market Economy

• Also called capitalism
• Economic decisions made by individuals, not
  government
• Advantage Freedoms, wide array of goods to buy,
  efficient production
• Disadvantage Weak can get left behind

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Mixed Economy

• Combination of a market economy and command
  economy
• Individuals own factors of production
• Government regulates business to protect
  individuals
• Example United States

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6 Characteristics of the American Economy

• Limited role of government
• Freedom of enterprise
• Freedom of choice
• The profit incentive
• Private property
• Competition

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1. Limited Role of Government

• Adam Smith - The Wealth of Nations - 1776
• Individuals left on their own will work for their
  own self-interest (Govt stay out of it!)
• Invisible hand guides them to use resources
  efficiently
• Capitalism
• laissez faire - let people do as they choose
• From 1880s on, the role of govt has increased

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2. Freedom of Enterprise

• Individuals are free to own and control the
  factors of production
• Government limits this freedom
• Licensing requirements, child labor laws

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3. Freedom of Choice

• Buyers determine what should be produced
• Government regulates freedom of choice by
  ensuring that products sold are safe

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4. Profit Incentive

• Profit - the money remaining after all costs of
  production are paid
• Profit incentive - the desire to make a profit by
  selling goods and services

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5. Private Property

• Property can be land, a car, a business, and
  hundreds of other items
• Private property - property owned by individuals
  or businesses, not the government
• The U.S. Constitution guarantees an owners right
  to private property and its use

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6. Competition

• Competition - the rivalry among producers of
  similar products to win more business
• Competition leads to an efficient use of
  resources
• For competition to exist, it must be easy for new
  businesses to enter an industry

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Goals of Free Enterprise
There are tradeoffs among these goals.

• Economic Freedom
• Economic Efficiency
• Economic Equity
• Economic Security
• Economic Stability
• Economic Growth

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Economic Freedom

• Goal To allow each member of society to make
  choices.
• Americans have the highest degree of freedom in
  the world.

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Economic Efficiency

• Goal Use resources wisely.
• Why? Resources are scarce.

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Economic Equity

• Goal Fairness.
• We have laws to ensure equal pay, fairness in
  hiring practices, etc.

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Economic Security

• Goal Protection against risks beyond our
  control.
• Government provides such security through social
  programs.

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Economic Stability

• Goal Reduce the extreme ups and downs of our
  standard of living.
• The material well-being of our nation

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Economic Growth

• Goal Increase the amount of goods produced over
  the long term.
• Our population is expanding the nations economy
  must grow to meet the additional wants and needs

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Responsibilities

• Support yourself and your family
• Become a productive member of the economy
• Electing responsible government officials
• You must have a knowledge of government policies
  and the ability to analyze them.
• So pay attention )