Different Economic Systems and the American Economy

1. Chapter 2 – Economics Different Economic Systems and the American Economy

2. Different Economic Systems… • Four different types of economic systems have evolved throughout history as cultures, societies, and nations have struggled with what to do with the factors of production… • 1) Land • 2) Labor • 3) Capital

3. Three Questions to be answered! • Cultures, societies, and nations have placed emphasis on different goals and priorities in their efforts to answer three basic questions: • 1) What goods and services should be produced? • 2) How should they be produced? • 3) Who should get what is produced?

4. Types of Economic Systems • Traditional System • Command System • Market System • Mixed System

5. Traditional Economy • 3 questions answered according to tradition • “things are done the way they always have been done” • Decisions based on customs and beliefs • Handed down through generations • Advantages • You know what is expected of you • Ties to others extremely strong • Disadvantages • Change is discouraged • Production inefficient

6. Command Economy • 3 questions answered by government leaders • Individual • small group • Central planners • Gov’t controls the factors of production • Advantage • Speed which decisions are made • War-time changes • Disadvantage • Lack of incentives to work hard • Lack of consumer goods • No reason to work smartly or efficiently

7. Market Economy • AKA – Capitalism • 3 questions are answered by individuals deciding for themselves • “markets” – voluntary exchange (far and wide!) • The circular flow of economic activity explains how the market system works… • Explains the exchange of good and services between producers and consumers…

8. Market Economy

9. Market Economy • Advantages • People have freedoms • Competition provides consumers with choices of goods • Efficient cost system • Disadvantages • Concern over those who cannot work • Too young, too old, too sick

10. Mixed Economy • Combines SOME government involvement and regulation with aspects of the free market… • Individuals have the ability to make choices, but governments regulate and control certain aspects of that economy…

11. The American Economy • The American economy is considered a mixed market. • aspects of governmental control in a free market system. • 6 key principles that drive the American economy and let it thrive… • 1) Limited role of Gov’t • 2) Freedom of Enterprise • 3) Freedom of Choice • 4) Profit incentive • 5) Private Property • 6) Competition

12. Limited Gov’t Involvement • Adam Smith and “Wealth of Nations” (1776) - capitalism and “laissez-faire” • Ind. left on their own would make decisions to benefit their own self-interest… • The U.S. system of Capitalism = freedom + limits by the gov’t • Because they are making decisions based on their own self-interest… they would use resources efficiently!

13. Freedom of Enterprise • Stimulates entrepreneurship! • Failure or success is possible • Individuals have the freedom to do what they please with factors of production! • Cars? Start an auto-shop! • Food? Open a restaurant! • Zoning regulations limit the U.S. free enterprise… • Should we have zoning? Does it cut back on free enterprise?

14. Freedom of choice • The opposite of free enterprise… • Concerns buyers, NOT sellers! • Buyers make decisions on what should be produced… • This is done through the purchases they make • Producers recognize these purchases and adjust accordingly

15. Profit Incentive • In the U.S., because of the economic system present, ind. are motivated to make a profit! • Profit motivates entrepreneurs to establish new technology and better products to keep customers… • $ left after costs of production are paid

16. Private Property • Probably the most important aspect of the U.S. economic system… • You are free to buy whatever you want – to make it your own… • You can decide what you want to do with your private property…

17. Competition • Lure of profits encourages competition… • Rivalry among producers creates/forces efficiency in the markets… • Lower prices • Better quality • Leads to efficient use of resources • Prices low to attract buyers • High enough to make profit

18. Goals of Free Enterprise • Freedom • Allow each member of society to make choices • Efficiency • Use limited resources wisely • Security • Government programs protect us from certain risks

19. Stability • Reduce extreme ups and downs in standard of living • Material well-being of individual, group, or nation • Growth • Producing increasing # of goods and services over long term • Equity • Economic system should be fair and just