ECONOMIC SYSTEMS and the American ECONOMY

Section 1: Economic Systems

I.  Three Basic Questions

  1. Economic System- way in which a nation uses its resources to satisfy its people’s needs and wants
  2. Each nation despite its Economic System must answer the same three questions
  3. What should be Produced?
  4. We live in a world of scarcity and tradeoffs
  5. If more of 1 item is produced then less of another is.
  6. How should it be Produced?
  7. Then how the G and S will be produced
  8. More laborers? Skilled or unskilled? Capital goods?
  9. And what combination will be used.
  10. For whom should it be Produced?
  11. Type of Economic/Government system in which people live will determine how G and S will be distributed among its members.
  12. The U.S. is through a price system
  13. Some through majority rule
  14. Some on a first come first serve basis
  15. Some equally
  16. Some through military force

II.  Types of Economic Systems

  1. There are 4 types of systems
  2. Traditional
  3. DEF-system in which economic decisions are based on customs and beliefs that have been handed down from generation to generation
  4. Advantage to this system is that you know what is expected of you, family and community are strong
  5. Disadvantage is the economy doesn’t change and methods of production are inefficient.
  6. Inuit of North America, San of the Kalahari in Africa, and the Aborigines of Australia.
  7. Command (controlled)
  8. DEF- system in which the government controls the factors of production and makes all decisions about their use.
  9. Government leaders may control the Factors of Production and make all decisions about their use.
  10. If you live here you receive a salary that the government decides and may not even be able to choose your profession.
  11. Advantage is speed in which resources are rerouted
  12. Disadvantage is lack of incentives to work hard or show inventiveness. Plus a lack of consumer choices
  13. North Korea, People’s Republic of China
  14. Market System (Capitalist)
  15. DEF- system in which individuals own the factors of production and make economic decisions through free interaction while looking out for their own and their families’ best interests.
  16. Individuals answer the three basic questions based on information in the form of market prices.
  17. MARKET- freely chosen activity b/t B and Se of G and S
  18. As price changes they act as signals to what should be bought and what should be produced.
  19. HIGH PRICE means SCARCITY--> LOW PRICE means ABUNDANCE
  20. Circular Flow of Economic Activity - economic model that pictures income as flowing continuously b/t business and consumers.
  21. Advantages are people have freedom to choose and the existence of competition provides consumers with a variety of G and S, plus it is an efficient system of determining cost.
  22. Disadvantage is those too young, old, or sick to work cannot participate
  23. Mixed System
  24. DEF- system combining characteristics of more than one type of economy
  25. The U.S. has this system along with most countries in the World today.
  26. It combines individual choice with government intervention
  27. The goals individuals set for society help determine the economic system but so does the amount of government involvement.

Section 2

I.  Limited Role of Government

  1. Economist Adam Smith in 1776 described a system in which government has little to do with a nation’s economic activity.
  2. Capitalist- Smiths version of the ideal economic system.
  3. DEF- economic system in which private individuals own the factors of production.
  4. Laissez-faire- a French term that means “let people do as they choose”.
  5. DEF- economic system in which the government minimizes its interference with the economy

II.  Freedom of Enterprise

  1. This term emphasizes that individuals are free to own and control the factors of production.
  2. However you instead loose money because you- or any entrepreneur- have no guarantee of success.
  3. Free enterprise system- Economic system in which individuals own the factors of production and decide how to use them within legal limits; same as capitalism
  4. Zoning regulations, child-labor laws, hazardous waste disposal rules, and other regulations limit free enterprise to protect you and your neighbors.

III.  Freedom of Choice

  1. Other side of Free Enterprise meaning Buyers NOT Sellers make decisions about what should be produced
  2. Despite Buyers choice the government has also stepped in to set up safety guidelines

IV.  Profit Incentive

  1. Profit- money left after all the costs of production-wages, rents, interest, and taxes- have been paid
  2. Profit Incentive- desire to make money that motivates people to produce and sell goods and services
  3. When money is not being made it signals a change needs to be made and resources moved elsewhere…this keeps the economy moving efficiently.

V.  Private Property

  1. DEF- whatever is owned by individuals rather than by government.
  2. This is the right to risk involvement but is good when it results in profit

VI.  Competition

  1. DEF- rivalry among producers or sellers of similar goods and services to win more business.
  2. Leads to the efficient use of resources
  3. To exist barriers to enter and exit must be weak

Section 3

I.  Goals of Free Enterprise

  1. Economic Freedom
  2. The goal is to allow each member of society to make choices

ii.  But along with this there are a lot of risks with little government intervention.

  1. Economic Efficiency
  2. DEF- wise use of available resources so that costs do not exceed benefits.
  3. Be careful that costs of economic actions do not exceed benefits
  4. Economic Equality
  5. DEF- the attempt to balance an economic policy so that everyone benefits fairly
  6. Usually the government interferes
  7. Economic Security
  8. Government provides security against risks that are beyond our control through a number of government social programs.
  9. Economic Stability
  10. Standard of living- the material well-being of an individual, group, or nation measured by how well their necessities and luxuries are satisfied.
  11. This is measured by the G & S used by the average citizen during a given period of time.
  12. Economic Growth
  13. DEF- expansion of the economy to produce more goods, jobs, and wealth
  14. As the population grows so does the economy to satisfy additional needs and wants
  15. Trade-offs Among Goals
  16. B/c of scarcity achieving national goals requires trade-offs
  17. A plan of action needs to be developed to meet goals in a given situation

II.  Rights and Responsibilities

  1. You have the right to enter into any profession, work as hard as you like, and buy the products you want.
  2. You must be able to support your family and yourself
  3. You need to use your education in a reasonable manner
  4. You must elect responsible government officials.