Chapter 2 Economic Systems
BIG IDEAS = Responsibility, Choices, Changes, and Relationships
Essential Questions:
–
How do societies provide for their people in a traditional, command and market
economy?
–
How do the major characteristics of free enterprise capitalism work in the US?
–
What goals affect the roles of government, consumers, and entrepreneurs in
the US economy?
* Remember you are responsible for answering one of these essential questions at the
end of this chapter as an assessment.
Why it matters
Understand: Economic systems govern WHAT goods and services to produce,
HOW to produce them and for WHOM to produce them. The US basic economic
decisions are made through the free interactions of individuals looking out for their
best interests.
1
LEARNING GOALS:
1. Explain why every society has an economic system to allocate goods and
services.
2. Explain the advantages and disadvantages of all economic systems.
(T,C,M and C,S,M)
3. Describe the characteristics of free enterprise.
4. Describe the roles of government, consumers and entrepreneurs play in
free enterprise capitalism.
What you need to Do and Be Skilled at:
•
Read, comprehend, and summarize key information from text
collaboratively for a study guide.
•
Identifying and providing examples of various economies with real world
applications. (T,C,M and C,S,M)
•
Illustrating and explaining economic systems and key concepts within
events and a block buster movie.
2
Enter Lesson #1 Vocabulary KNOW
9 Vocab words
• economic system • market
economy
• traditional
economy
• market
• command
economy
• socialism
• communism
• capitalism
• mixed economy
3
Economic Systems
• All societies use an economic system to
provide for needs and wants of their people.
• Three major economic systems exist:
– Traditional
– Command
– Market
• Most economies today combine the
elements of all three.
4
Traditional Economies
Traditional economies use ritual, habit, or customs to answer
the basic questions of WHAT, HOW, and FOR WHOM to produce.
A traditional economy—use of scarce resources and economic
activity is based on habit or custom.
•
Advantages
– Everyone knows which role to play.
– Little uncertainty on what or how to produce.
– Customs and traditions determine who is provided for.
•
Disadvantages
– Individuals generally not free to make decisions
– New ideas discouraged, leading to stagnation and a lower standard
of living
– Strict rules defined by elders and ancestors
5
Command Economies
Command economies rely on a central authority to make most
of the economic decisions.
A central authority makes the major decisions in a command
economy.
•
Advantages
– Can change direction drastically through emphasizing/allocation
– Health and public services available to everyone at little or no cost
•
Disadvantages
– Basic wants and needs of consumers are ignored.
– Economies tend to be unproductive, not producing a good product.
– Large decision-making bureaucracy lacks flexibility.
– Severely limits private property rights
– Individual freedom and initiative are limited.
6
Market Economies
In a market economy, consumers and
businesses jointly answer the questions of
WHAT, HOW, and FOR WHOM to produce.
A market economy allows people to make decisions
in their own best interest.
•Buyers and sellers exchange goods and services in
a market.
•Market economies are based on capitalism, which
means that the factors of production are privately
owned.
7
Market Economies (cont.)
• Advantages
– High degree of individual freedom
– Adjusts gradually to change over time
– Small degree of government interference
– Decision making is decentralized
– Large variety of goods and services
– High degree of consumer satisfaction
• Disadvantages
– Not everyone is provided for
– May not provide enough of some basic goods and services
– High degree of uncertainty for workers and employers
8
Mixed Economies
Most economies in the world today feature some
mix of traditional, command, and market
economies.
Most economies in the real world are mixed
economies.
•When political systems are considered with economic
systems, the picture gets more complicated.
•An example is socialism and its extreme,
communism.
•The type of political system in a mixed economy is less
important than the way basic economic decisions are
made.
9
Mixed Economies (cont.)
• Advantages of a mixed economy
– Provides assistance for some people who might
otherwise be left out
– In a democratic society, voters use electoral power to
affect WHAT, HOW, and FOR WHOM decisions.
– In a socialist society, FOR WHOM is addressed more
directly by government.
• Disadvantages of a mixed economy
– More services mean higher costs for citizens overall.
– In socialist countries, availability of services may be
limited or quality deteriorates over time.
EXIT LESSON #1
10
Enter Lesson #2 Vocabulary KNOW
8 Vocab words
• free enterprise • profit
• voluntary
exchange
• profit motive
• competition
• mixed or
modified free
enterprise
economy
• private property
• consumer
rights
sovereignty
11
American Free Enterprise Characteristics of
the US Economy
•
In many parts of the world, capitalism has become the
economic choice.
•
Capitalism allows private citizens to own and use the factors
of production to generate profits.
•
The U.S. economy is based on free enterprise.
•
Capitalism and free enterprise are often used
interchangeably, although meanings are different.
– Capitalism stands for the private ownership of resources.
– Free enterprise is the unhindered use of privately owned
resources to earn profits.
12
Characteristics of Free Enterprise Capitalism
The US economy incorporates 5 major characteristics of a free
enterprise economy.
• Competition
• Economic freedom
• Private property rights
• Private property gives individuals incentive to work, save,
and invest.
• Profit motive
• People are free to take risks to earn a profit.
• Voluntary exchange
13
The Role of the Entrepreneur
Entrepreneurs are the driving force of the free enterprise system. They:
– Organize and manage land, capital, and labor to gain a profit
– Are the people who start up new businesses
– Want to “be their own boss”
– Are willing to take risks
Entrepreneurs are both the spark plug & the catalyst of the free enterprise
economy.
•
Their search for profits leads to a chain of events that brings:
– New products
– Greater competition
– More production
– Higher quality
– Lower prices for consumers
14
The Role of the Consumer
The economy in the United States adapts to consumers wants.
•
Consumers ultimately determine which products are
produced.
•
If consumers like a new product, producers are rewarded with
profits.
•
Consumers not purchasing a product can cause a firm to go
out of business.
•
The phrase “the customer is always right” recognizes
consumer sovereignty.
•
Consumers are always looking for new ideas and products.
15
The Role of the Government
The economic role of the U.S. government is decided by its citizens.
The role of government stems from the desires, goals, and aspirations of
its citizens.
•
Government has become a protector, provider, regulator, and
consumer
• In general, the role of government in the economy is justified whenever
the benefits outweigh the costs.
• An unintended consequence of government’s role is the emergence of
the mixed or modified free enterprise economy.
• Some people prefer to have no government involvement in the
economy—which is not possible.
• Services like a national defense & a system of laws & justice cannot be
supplied by the private sector alone.
EXIT LESSON #2
16
Economic and Social Goals of the US Economy
The 3 different roles share different goals in the US economy.
•
Economic efficiency
•
Economic equity
•
Economic security
•
Full employment
•
Price Stability
•
Economic growth
•
Economic freedom
17
Economic and Social Goals In the United States, we
share several economic and social goals.
EXIT LESSON #3
18