economic perspectives - chapter 2
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ECONOMIC PERSPECTIVES - CHAPTER 2
Economic Systems and the American System
Section 1
ECONOMIC SYSTEMS
MAIN IDEA:All economic systems face the same
basic questions.But first… What is an economic system?
The way in which a nation uses its resources to satisfy its people’s needs and wants
THREE BASIC QUESTIONS:
What should be produced?
How should it be produced?
For whom should it be produced?
REVIEW OF CHAPTER 1
1. The “choice/alternative” you give up when you make a decision is called ________________.
2. The way in which a nation uses its resources to satisfy its people’s needs and wants is ___________.
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
• Individuals own the factors of production and make econ. decisions through free interactions
• Combines the characteristics of more than one type of economy
Traditional economy
Command economy
Market Economy
Mixed economy
TRADITIONAL ECONOMY
•You know what is expected of you•Strong family and community tiesAdvantage
•Change in economy is discouraged and sometimes punished•Rarely have an increase in material well-being
Disadvantage
•Inuit of N. America•Mbuti of the Democratic Republic of Congo•Aborigines of AustraliaExamples
The “way it’s always been done”Career is what your parents did (ie. Fisherman)
COMMAND SYSTEM
•Individuals paid according to what central planners decide.•Might not be able to choose own career.•Lack of incentive to work hard•Lack of consumer choices
Disadvantages
•North Korea•Parts of the People’s Republic of China
Examples
Government is in control and makes all economic decisions
MARKET SYSTEM (AKA CAPITALISM) Market—more than just a “place” – it’s
a voluntary exchange of goods and services between buyers and sellers
•Individual choices (careers, how to spend money, own property, option to take risks and earn profits)•Competition provides choices and better products•Choices, choices, choices
Advantages
•Old, young, and sick that can’t work – who provides for them?
Disadvantages
MIXED ECONOMYMost countries have a mixed economy – including the United
States
Individual Level:
Local, State & Federal
Government
BARTERING Exchange of goods or services without
the use of money Thousands of years and is still happening Silent Trade
One group of traders deposits goods in a pre-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
CIRCULAR FLOW MODELBusinesses Sell goods and services to individuals
Individuals pay for goods and services they buy from business
Businesses pay for resources they buy from individuals
Individuals sell resources to businesses
Businesses Pay Taxes
Individuals Pay Taxes
Gov’t benefits to businesses
Gov’t benefits to individuals
CIRCULAR FLOW OF INCOME AND OUTPUT Charts in Motion http://glencoe.com/sites/common_assets/socialstudies/in_motion_08/ett/
Figure2-2.swf
SECTION 2Capitalism 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, and local) has increased significantly.
Capitalism – economic system in which private individuals own the factors of production
Laissez-faire – economic system in which the government minimizes the interference with the economy a French term meaning “let (people) do (as
they choose).” Limited Government includes –
regulation, safety, money supply, and taxes.
ADAM SMITH –
AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS.
Individuals left to their own would be guided as if by an “invisible hand” to use resources efficiently and thus achieve the maximum good for society.
SECTION 2Other Characteristics
In a free market, economic activity is coordinated by private businesses and individuals responding to market signals.
SECTION 2Other Characteristics (cont.)
The American economy is known as a free enterprise system. Individuals are free to own the factors of production and decide how to use them within legal limits; same as capitalism.
SECTION 2Other Characteristics (cont.)
Americans also have freedom of choice where buyers, not sellers, make the decisions about what should be produced.– 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 2Other Characteristics (cont.)
The desire to make a profit is referred to as profit incentive or profit motive.
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, industry barriers to enter into, and exit from must be weak.
SECTION 2Other Characteristics (cont.)
Competition leads to an efficient use of resources since businesses are forced to keep costs of production as low as possible.
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 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
LAW OF DIMINISHING UTILITY Rule stating that the additional
satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased
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