ECONOMIC-POLITICAL SYSTEMS

THREE TYPES Each country has an economic and

political system. The political system determines the

economic system. Three basic types:

CapitalismSocialismCommunism

CAPITALISM Capitalism is an economic-political

system in which private citizens are free to go into business for themselves, to produce whatever they choose, and to distribute what they produce.

the right to own property. Also known as the free enterprise

system

SOCIALISM Socialism is an economic-political

system in which the government controls the use of the country’s factors of production.

Socialists do not agree as to how much of the productive resources government should own.

Socialism is often associated with mixed economies.

SOCIALISM Socialism is generally disliked in the U.S.

because it limits the right of the individual to own property for productive purposes.

The right to own property exists in socialism, in different degrees, depending upon the amount of government ownership and control.

Ex. Sweden, Italy.

COMMUNISM Communism is extreme socialism, in which

all or almost all of a nation’s factors of production are owned by the government.

The government decided what and how to produce and how to divide the results of production among the citizens.

Consumer goods are often in short supply. The government channels a large

proportion of production toward capital formation.

People do not own property. All economic decisions are made by government leaders.

FUNDAMENTALS OF CAPITALISM Right to private property. Right of each business to make profit. Right of each business to set its own

prices. Right to compete. Right to determine wages paid to its

workers

PRIVATE PROPERTY Private property consists of items of

value that individuals have the right to own, use, and sell. Individuals can control productive resources.

They can own land, hire labor, and own capital goods.

They can use these resources to produce goods and services.

Individuals own products made from their resources.

PROFIT In capitalism, the incentive and reward

for producing goods and services with utility is profit.

Profit = Sales - Expenses The profit earned by a business is often

overestimated by society. The average profit is about 5 percent of total receipts.

Being in business does not guarantee that a company will make a profit.

PRICE SETTING Demand for a product refers to the

number of products that will be bought at a given time at a given price.

Demand is not the same as want. Wanting an expensive luxury car without having the money to buy one does not represent demand. 

Demand is represented buy those people who want it, have the money to buy it, and are willing to spend the money for it.

DEMAND There is a relationship between price

and demand. With increased demand, prices generally

rise in the short run. When demand decreases, prices

generally fall.

SUPPLY The supply of a product also influences

its price. Supply of a product refers to the

number of like products that will be offered for sale at a particular time and at a certain price.

If there is a current shortage of a product, its price usually rises as consumers bid against one another to obtain the product.

SUPPLY Generally changes in prices determine

what is produced and how much is produced in our economy.

Price changes indicate to businesses what is profitable or not profitable to produce. Prices are determined by the forces of supply and demand.

COMPETITION Competition is the rivalry among sellers

for consumer’s dollars. Competition benefits society in many

ways:a business must improve the quality of

productsdevelop new productsoperate efficiently in order to keep prices

down Competition serves to ensure that

consumers will bet the quality products they want at fair prices.

COMPETITION tends to make all businesses use our

scarce productive resources efficiently. benefits individuals because it provides

the chance for people to go into business for themselves and to share in the profits being made by those already in business.

Competition is the opposite of monopoly.

COMPETITION Monopoly is the existence of only one

seller of a product. A monopolist can charge unreasonably high prices and make extraordinary profits.

Legislation exists that can encourages competition and discourages monopolies

INCOME DISTRIBUTION Countries must also decide how the

goods produced will be divided among the people in the society.

In a free enterprise economy, the share of goods produced that an individual receives is determined by the amount of money that person has to purchase goods and services.

People receive income – wages and salaries- by contributing their labor to the production of goods and services.

INCOME DISTRIBUTION The amount of money received in wages

or salary is determined by many factors, including personal traits and abilities.

The same factors that determine the prices of goods are also important in determining wages and salaries.

Supply and demand.

MANAGING THE ECONOMY The strength of a nation depends on its

economic growth. Economic growth is measured by:annual increase in the GDP increased employment opportunitiescontinuous development of new and

improved goods and services

PROMOTING ECONOMIC GROWTH Economic growth occurs when a country’s

output exceeds its population growth. More goods and services are available for

each person. Basic ways to increase the production of

goods and services in order to encourage economic growth: increase the number of people in the

workforce increase the productivity of the workforce increase the supply of capital goods improve technology

PROMOTING ECONOMIC GROWTH

redesign work processes in factories and offices to improve efficiency

increase the sale of goods and services to foreign countries

decrease the purchase of goods and services from foreign countries

For economic growth to occur, just increasing the production of goods and services is not enough. They must also be consumed.

MEASURING ECONOMIC GROWTH To know whether the economy is

growing at a desirable rate, statistics must be gathered.

GDP (Gross Domestic Product) CPI (Consumer Price Index) Employment Retail Sales New Home Sales

GROSS DOMESTIC PRODUCT The total market value of all final goods

and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.

CONSUMER PRICE INDEX The CPI indicates what is happening in

general to prices in the country. It measures the average change in

prices of consumer goods and services typically purchased by people living in urban areas.

EMPLOYMENT An economic condition marked by the

fact that individuals actively seeking jobs remain unhired.

Unemployment is expressed as a percentage of the total available work force.

The level of unemployment varies with economic conditions and other circumstances.

RETAIL SALES broad consumer spending patterns

based on the retail sales of consumer-durables (goods that usually last more than three years) and consumer non-durables (that usually last less than three years).

NEW HOME SALES Measure of how many new homes were

for sale and how many were sold.

ECONOMIC PROBLEMS Problems occur with the economy when

the growth rate jumps ahead or drops back too quickly.

Recession is a decline in the GDP that continues for six months or more. Occurs when demand for the total goods and services available is less than the supply

ECONOMIC PROBLEMS Inflation is the rapid rise in prices

caused by an inadequate supply of goods and services. Total demand exceeds supply. Results in a decline in purchasing power of money.

CORRECTING ECONOMIC PROBLEMS Most industrialized nations experience

business cycles, a pattern of irregular but repeated expansion and contraction of the GDP. Business cycles last about five years. Four phases:

Expansion Peak Contraction Trough

CORRECTING ECONOMIC PROBLEMS They can vary in length and intensity. Some can be severe. When statistics show that the economy

may be about to enter a recessionary period (contraction) or an inflationary period (expansion), the government can take certain actions.

Controlling taxes, regulating government expenditures, and adjusting interest rates.

CORRECTING ECONOMIC PROBLEMS Controlling Taxes Taxes are raised to slow growth and

lowered to encourage growth. When taxes are raised, there is less

money to spend, which discourages economic growth.

When taxes are lowered, people and businesses have more money to spend which encourages growth.

CORRECTING ECONOMIC PROBLEMS Government Expenditures Federal government spends billions of

dollars each year to pay salaries and buy equipment.

Government can increase its spending to stimulate a slow economy or reduce spending to slow economic growth.

CORRECTING ECONOMIC PROBLEMS Interest Rates Interest rates is the money paid to

borrow money. Borrowing by businesses and consumers

generates spending. Spending stimulates the economic

growth. When interest rates are lowered,

businesses are encouraged to borrow.

CORRECTING ECONOMIC PROBLEMS Using these and other methods, the

economic growth can be somewhat controlled,

however, it is usually kept to a minimum in a free enterprise system.