Economic Systems and the American Economy Chapter 2

Economic Systems and the American Economy Chapter 2

Learning Objective • I can describe the 3 basic questions that all economics systems attempt to answer

Three Basic Questions • Economic System • The way a nation determines how to use its resources to satisfy its people’s needs and wants • What Should Be Produced? • How Should It Be Produced? • For Whom Should It Be Produced?

Learning Objective • I can identify advantages and disadvantages of traditional, market, command, and mixed economic systems.

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

Traditional • Questions answered by how they have been done in past. (often religious) • Advantages – Expectations Known – Strong Community • Disadvantages – – Change Discouraged (punished) Inefficient Productions Limited Consumer Choices Little Increase in Standard of Living

Command • Government leaders control FOP and make all decisions (single person or central group) • Disadvantages • Lack of Incentives • Limited Consumer Choices • Advantages • Quick Changes Possible • Necessities at Little or No Cost

Market • Individuals own FOP and therefore make all decisions. • Market – Voluntary Exchange of Goods and Ideas • Prices combination between buyers and sellers. Tells what to buy and produce. • Circular Flow of Income and Output

Market Cont. • Advantages – Freedoms • • Career How to Spend Income Property Ownership Whether to Take Risks – Lots of Choices in Goods Due to Competition – Supply and Demand determine prices • Disadvantages – No concern over elderly, disabled, or too young to work. – Change is Gradual

Mixed • Combines elements of Pure Market and Command. • Individual decision making and private ownership ALONG WITH government intervention and regulation.

Characteristics of the American Economy • • • Limited Role of Government Freedom of Enterprise Freedom of Choice Profit Incentive Competition Private Property

Limited Role of Government • Adam Smith (1776) An Inquiry into the Nature and Causes of the Wealth of Nations – Invisible Hand • Pure Capitalism (Market) – Laissez-Faire – Let people do as they choose. • U. S. – Let People Own Businesses and Industries BUT Must Operate Within Legislative Limits.

Freedom of Enterprise • Private ownership of property and businesses. • Entrepreneurship – YOU TAKE THE RISK • Within Certain Limits However • Zoning Regulations • Child Labor Laws • Consumer Protection Agencies

Freedom of Choice • Buyers (not sellers) make decisions about what to produce • Government Intervention • Sets Safety Standards • Regulates Prices (under limited competiton)

Profit Incentive • Desire to Make a Profit • Provides motivation to improve, make better • Losses? Signal to move elsewhere.

Competition • Requires large number of independent sellers • Encourages Efficiency • Keep Prices Low to Sell • But High Enough for Profits • Must Keep Low Production Costs • Must have little stopping entering and exiting

Private Property • Individual right to buy property whenever you want. • Individual controls how and when to use property. • Constitution guarantees an owner’s right to private property and its use

Goals of Free Enterprise • • • Economic Freedom Efficiency Equity Security Stability Growth

Economic Freedom • Free to Make Choices • Start own Businesses • Own Private Property • Where and When to Work • Must Accept Consequences

Economic Efficiency • Using Limited Resources Wisely • Scarcity a Problem

Economic Equity • Fairness • Lawmakers pass wage laws • Discrimination laws

Economic Security • Protection against things beyond our control • • Work Related Injuries Natural Disasters Bank Failure Old Age

Economic Stability • Reduce ups and downs of Standard Of Living- material wellbeing of individual, group, or nation. • Measured by average value of goods and services used by average citizen during given period of time. • We have more enjoying highest SOL than anywhere in world.

Economic Growth • Producing more goods and services over long term • Must happen WHY? ? ?

Rights and Responsibilities • Rights • Enter any job or profession you want • Can work as hard as you want • Buy what you want • Responsibilities • Ability to support you and family • Become a productive member of Free Enterprise • Electing responsible officials: • Need knowledge of policies • Ability to analyze consequences of policies

Pure Socialism • Government manages Production and Distribution – North Korea, Cuba • Karl Marx – Bourgeoisie vs. Proletariat • Value of Goods Depends on How Much Labor Went Into Production • Bourgeoisie used Proletariat unfairly • Used their labor then kept profits • Capitalism was doomed to fail • Would evolve into Socialism then Communism – System with no need for government • Irony: Today came to mean authoritarian system that supports revolution to gain power. • Proletariat actually has little to no power

Characteristics of Pure Socialism • Prices set by State – Not by Supply and Demand • Movement or Resources (especially Labor) Controlled by the State • Most Factors of Production Owned by the State. Private Property Limited to Tools Needed for Occupation • Risk Taking Not Permitted. State Takes All Risks. Citizens Share in Unsuccessful Risks. • What, How, and for Whom to Produce Made by State Officials

4 Steps in Change to Socialism 1. Extreme Recessions and Depression - Only A Few Wealthy Would Emerge 2. Income Gap Causes Poor Workers to Revolt 3. New System Established - Workers Own Businesses (Through The State) 4. Evolve to Pure Communism – Workers contribute and only take what they need

Socialism Since Marx • Democratic Socialism – Election of Socialists to Political Office • Government Controls Some Areas of Economy • Authoritarian Socialism – Revolution to Overthrow Capitalism. • Central Government Controls Entire Economy

Benefits of Capitalism • Personal Freedom and Initiative • Socialism: Total Government Interference • Marketplace Efficient – Allows for Growth • Socialism: Growth Stagnant

Planned Economies • ALL ECONOMIES ARE PLANNED • Difference is who is doing the planning: • Socialism: Government Does the Planning • Capitalism: Individuals, Businesses, Elected Officials do the planning • Problems with Capitalism: • Income Inequality • Lacks enough Public Assistance (socialism offers)