MAIN IDEA:
All economic systems face the same basic
questions.
But first…
first
 What is an economic system?
 The
way in which a nation uses its resources to
satisfy its people’s needs and wants
Economic Systems and the American System
ECONOMIC PERSPECTIVES - CHAPTER 2
REVIEW OF CHAPTER 1
THREE BASIC QUESTIONS:
What should be produced?
1.
1
2
2.
How should it be produced?
The “choice/alternative”
choice/alternative you give up when you
make a decision is called ________________.
The way in which a nation uses its resources
to satisfy its people’s needs and wants is
___________.
For whom should it be
produced?
TYPES OF ECONOMIC SYSTEMS
•System in which
economic decisions are
based on customs and
beliefs that have been
handed down
from generation to
generation
• Government
controls the factors
of production &
makes decisions
about their use
Traditional
economy
Mixed
economy
• Combines the
characteristics of more
than one type
y of
economy
Command
economy
TRADITIONAL ECONOMY
The “way it’s always been done”
Career is what your parents did (ie.
(ie Fisherman)
Ad
Advantage
t
Disadvantage
Market
Economy
•Individuals own the
factors of production
and make econ.
econ
decisions through free
interactions
Examples
• You know what is expected of you
• Strong family and community ties
• Change in economy is discouraged and
sometimes punished
• Rarely have an increase in material well
well-being
being
• Inuit of N. America
• Mbuti of the Democratic Republic of Congo
• Aborigines of Australia
MARKET SYSTEM (AKA CAPITALISM)
COMMAND SYSTEM
Government is in control and makes all economic decisions
Disadvantages

•Individuals paid according to what central
planners
l
decide.
d id
•Might not be able to choose own career.
•Lack of incentive to work hard
•Lack of consumer choices
Market
more than just a “place”
place – it
Market—more
it’ss a
voluntary exchange of goods and services
between buyers and sellers
Advantages
•North Korea
•Parts of the People’s Republic of China
Examples
Di d
Disadvantages
t
MIXED ECONOMY

of years and is still happening
 Silent Trade
 One
group of traders deposits goods in a pre
pre-arranged
arranged
spot.
 Second group either accepts goods and leaves some in
return or rejects offering – first group then makes
changes to offering and second group accepts or rejects
 No contact is made between the two groups
• Make laws protecting private property &
regulating parts of business
E i
l protections,
i
S
f guidelines,
id li
• Environmental
Safety
and consumer protection
CIRCULAR FLOW MODEL
Exchange of goods or services without the use
of money
 Thousands
• Your own money situations
Local, State &
Federal
Government
•Old, young, and sick that can’t work – who provides
for them?
BARTERING
Most countries have a mixed economy –
including the United States
Individual
Level:
•Individual choices (careers, how to spend money,
own property, option
i to take
k risks
i k and
d earn profits)
fi )
•Competition provides choices and better products
•Choices, choices, choices
CIRCULAR FLOW OF INCOME AND OUTPUT
Businesses Sell goods and services to individuals

Charts in Motion

http://glencoe.com/sites/common_assets/socialstudies/in_motion_08/ett/Figure2-2.swf
p //g
/
/
_
/
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Individuals pay for goods and services they buy from business
Businesses Pay
Taxes
Gov’t
G
’ benefits
b
fi to
businesses
IIndividuals
di id l P
Pay
Taxes
Gov’t benefits to
individuals
Businesses pay for resources they buy from individuals
Individuals sell resources to businesses
SECTION 2
Capitalism
p
in the United States is best
defined as an economic system in which
private individuals own the factors of
production but use them within certain
legislated limits.
SECTION 2 – CHARACTERISTICS OF AN
AMERICAN ECONOMY
Main Idea – under Capitalism, government
plays a relatively limited role in the allocation of
resources
 Since the 1880’s, the role of government
(federal state,
(federal,
state and local) has increased
significantly.

Capitalism – economic system in which private
individuals own the factors of production
 Laissez-faire
Laissez faire – economic system in which the
government minimizes the interference with
the economy

a
French term meaning “let (people) do (as they
choose).”
choose)

Limited Government includes – regulation,
safety money supply,
safety,
supply and taxes.
taxes
SECTION 2
ADAM SMITH –
AN INQUIRY INTO THE NATURE AND CAUSES OF
THE WEALTH OF NATIONS.
NATIONS
 Individuals
left to their own would be guided as if by
an “invisible hand” to use resources efficientlyy and
thus achieve the maximum good for society.
Other Characteristics
In a free market,, economic
activity is coordinated by
private businesses and
individuals responding to
market signals.
signals
SECTION 2
Other Characteristics (cont.)
SECTION
2
Oth Characteristics
Other
Ch
t i ti (cont.)
Americans also have freedom of choice
where buyers, not sellers, make the
decisions about what should be produced.
The American economy is known as a free
enterprise system. Individuals are free to
own the
th ffactors
t
off production
d ti and
d decide
d id
how to use them within legal limits; same
as capitalism
capitalism.
– At times, the government has intervened
in various areas of the economy to
protect buyers and regulate price.
The goal of a business is to make a profit.
• amount earned after a business subtracts
its costs from its revenues
SECTION
2
Oth Characteristics
Other
Ch
t i ti (cont.)
SECTION
2
Oth Characteristics
Other
Ch
t i ti (cont.)
The desire to make a p
profit is referred to as
profit incentive or profit motive.
Competition
p
leads to an efficient use of
resources since businesses are forced to
keep costs of production as low as possible.
The risk of failing, when profits are not
realized, is also part of the free-enterprise
system.
In a free-enterprise system, the lure of profits
encourages competition.
For competition to exist,
exist industry barriers to
enter into, and exit from must be weak.
One of the most important characteristics of
capitalism is the existence of private
property.
• whatever is owned by individuals rather
than by government
View: Characteristics of the American Economy
CHAPTER 7 – MARGINAL UTILITY
LAW OF DIMINISHING UTILITY
Utility – the ability of any good or service to
satisfy consumer wants
 Marginal utility – an additional amount of
satisfaction to be gained by one more


Rule stating that the additional satisfaction a
consumer gets from purchasing one more unit
of a product will lessen with each additional
unit purchased