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Chapter Introduction

Section 1: Economic Systems

Section 2: Characteristics of the American Economy

Section 3: The Goals of the Nation

Section 4: Socialism and Capitalism

Visual Summary

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Chapter Intro 1

Every society has an economic system to allocate goods and services.


Chapter Intro 2

As an American, you have many economic choices available to you. Not all nations offer their citizens the same economic choices that most Americans enjoy. In this chapter, read to learn how the American economy is different from the economies of some other countries.


Chapter Preview-End


Section 1-Main Idea

Section Preview

In this section, you will learn about the four basic types of economic systems and how each one answers the three basic questions of what, how, and for whom to produce.


A. A

B. B

C. C

Section 1-Polling Question

Do you know much about the different economic systems that exist?

A. A good amount of information

B. A moderate amount of information

C. Not a lot of information 0% 0%0%


Section 1

Three Basic Questions

All economic systems face the same basic questions: What should be produced? How should it be produced? For whom should it be produced?


Section 1

Three Basic Questions (cont.)

• The way a nation uses its resources to satisfy its people’s needs and wants is called an economic system.


Section 1


– How should they be produced?

• Decisions must be made as to what the best combination of available inputs will be to get the job done for the lowest possible cost.

• An economic system must ask three basic questions:

– What goods and services should be produced?

• If more of one particular item is produced, then less of something else will be produced.


Section 1


– For whom should it be produced?

• The type of economic system under which people live determines how the goods and services will be distributed among its members.


A. A

B. B

C. C

Section 1

Deciding how many laborers to hire falls under which question?

A. What goods and services should beproduced?

B. How should they be produced?

C. Who should share in what is produced?

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Section 1

Types of Economic Systems

There are four basic types of economic systems: traditional, command, market, and mixed.


Section 1

Types of Economic Systems (cont.)

• Economists have identified four theoretical types of economic systems.

• The traditional economy system makes decisions based on customs and beliefs that have been handed down from generation to generation.


Section 1


• Advantages:

– You know what is expected of you.

– Family and community ties are strong.


Section 1


• Disadvantages:

– Change is discouraged and perhaps punished.

– Methods of production are often inefficient.

– Choices among consumer goods are rare.

– Individuals rarely experience an increased level of material well-being.


Section 1


• In a command economy (or controlled) system, government leaders control the factors of production and make all decisions about their use.


Section 1


• Disadvantages:

– Lack of incentives to work hard or show inventiveness.

– Lack of consumer choices.


Section 1


• In a market economy (or capitalist) system, individuals own the factors of production and make economic choices based on market price while looking out for their own and their families’ best interests.

• A market is the voluntary exchange of goods and services between buyers and sellers.

• Prices in a market coordinate the interaction between buyers and sellers.


Section 1


• The flow of resources, goods and services, and income in a market system is a circular flow of income and output.

View: Circular Flow of Income and Output


Section 1


• Advantages:

– People have freedoms.

– Competition provides consumers with a wide array of goods and services to choose.

– There is an efficient system of determining costs.


Section 1


• Disadvantages:

– Lack of concern about those too young, too old, or too sick to work.


Section 1


• A mixed economy system combines characteristics of more than one type of economy.

• Most countries have a mixed economy in which private ownership of property and individual decision making are combined with government intervention and regulations.


A. A

B. B

C. C

D. D

Section 1

A B C D

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In which type of system would you be “guided” into a career by a group of central planners?

A. Traditional

B. Command

C. Market

D. Mixed


Section 1-End


Section 2-Main Idea

Section Preview

In this section, you will learn about the major characteristics of a market economic system.


A. A

B. B

C. C


How much does advertising affect you?

A. A lot

B. A little

C. Not at all

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Section 2

Limited Role of Government

Under capitalism, government plays a relatively limited role in the allocation of resources.


Section 2

Limited Role of Government (cont.)

• Capitalism is another name for the market economy system.

• Pure capitalism has been called a Laissez-faire system; a French term meaning “let (people) do (as they choose).”


Section 2

Limited Role of Government (cont.)

• Capitalism 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.


A. A

B. B

Section 2

Since the 1880s, the role the government plays in regulation has remained predominantly the same.

A. True

B. False

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Section 2

Other Characteristics

In a free market, economic activity is coordinated by private businesses and individuals responding to market signals.


Section 2

Other 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 2


• 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.


Section 2


• 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 2


• 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.

View: Characteristics of the American Economy


A. A

B. B

C. C

Section 2

How much freedom should individuals have regarding the economy?

A. A large amount

B. A moderate amount

C. A small amount

A B C

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Section 2-End


Section 3-Main Idea

Section Preview

In this section, you will learn about the goals of the American free-enterprise system and the rights and responsibilities that individual Americans face as members of this system.


A. A

B. B

C. C


Do you think the United States upholds certain economic values?

A. Always

B. Sometimes

C. Rarely

A B C

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Section 3

Goals of Free Enterprise

The economic goals of free enterprise are freedom, efficiency, equity, security, stability, and growth.


Section 3

Goals of Free Enterprise (cont.)

• Economic goals of Americans:

– Freedom—to allow each member of society to make choices

– Economic efficiency—wise use of limited resources

– Economic equity—economic system should be fair and just


Section 3

Goals of Free Enterprise (cont.)

– Economic security—want protection against risks beyond our control

– Economic stability—attempt to reduce extreme ups and downs in the standard of living

– Economic growth—increased production of goods and services over time


A. A

B. B

C. C

D. D

Section 3

A B C D

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“Because of scarcity, if the factors of production are wasted, fewer good and services overall will be produced.”

Which goal does this quotation fall under?

A. Freedom

B. Efficiency

C. Security

D. Growth


Section 3

Rights and Responsibilities

Individuals have both rights and responsibilities within a free-enterprise system.


Section 3

Rights and Responsibilities (cont.)

• The American free-enterprise system bestows numerous economic rights and protections on us, but we must take on certain responsibilities (such as supporting ourselves and our family).

• We must also become knowledgeable about government policies and elect responsible government officials.


A. A

B. B

C. C

Section 3

Do you feel that, according to this book, most Americans are responsible?

A. Always

B. Sometimes

C. Rarely

A B C

0% 0%0%


Section 3-End


Section 4-Main Idea

Section Preview

In this section, you will compare the characteristics of socialism and capitalism.


Section 4-Key Terms

• socialism

• proletariat

• communism

• democratic socialism

• authoritarian socialism

Content Vocabulary


Section 4-Objectives

• continual

• initiative

Academic Vocabulary


A. A

B. B


Can you define socialism?

A. Yes

B. No

A B

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Section 4

Pure Socialism

Pure socialism is characterized by centralized economic planning and state ownership of the factors of production.


Section 4

Pure Socialism (cont.)

• Pure command socialism is an economic system in which there is little private property and the government owns the factors of production and attempts to manage output and the distribution of goods.

View: Pure Socialism


Section 4


• Karl Marx viewed history as a continual struggle between capitalists (owners of land, machines, and factories) and the proletariat (workers).

– He believed that the capitalists exploited the proletariat.

View: The Change From Capitalism to Socialism According to Marx


Section 4


• He outlined the eventual collapse of capitalism and predicted the evolution of socialism into communism, an idealized society in which no government is necessary.

• Today, communism means any authoritarian socialist system that supports revolution as a means to overthrow capitalism and bring about socialist goals.


Section 4


– Democratic socialism

– Authoritarian socialism

• In the twentieth century, socialism split into two major trends:


A. A

B. B

C. C

D. D

Section 4

A B C D

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The following are characteristics of pure socialism EXCEPT

A. Most prices are set bythe state.

B. Individual risk taking is not allowed.

C. A laissez-faire government is in control.

D. Most of the major factors of production are owned by the state.


Section 4

The Benefits of Capitalism

The main benefits of capitalism are economic efficiency and individual freedom.


Section 4

The Benefits of Capitalism (cont.)

• Supporters of capitalism:

– Those who place a high value on personal freedom, initiative, and individuality.

– Demonstrate that capitalism allows for more efficiency in the marketplace and for greater rates of economic growth.

View: Planning in Market and Command Economies


Section 4

The Benefits of Capitalism (cont.)

• The United States has an economy planned by private firms, individuals, and elected government officials, while socialism has an economy planned by central planners.

• Problems of capitalism:

– Income is unequally distributed throughout the economy.

– There are not enough schools and museums for the general public.


A. A

B. B

C. C

Section 4

Do you feel that capitalism is beneficial for the economy?

A. Definitely

B. Somewhat

C. Not at all

A B C

0% 0%0%


Section 4-End


VS 1

All economic systems answer three basic questions: what to produce, how to produce, and for whom to produce.


VS 2

There are four basic types of economic systems: traditional, command, market, and mixed.


VS 3

The American economy is defined by six basic characteristics.


VS-End


Figure 1

Figure 2

Figure 3

Figure 4

Figure 5

Concept Trans Menu

Economic Concepts Transparencies

Transparency 4 Economic Systems

Transparency 7 Markets and Prices

Select a transparency to view.

Concept Trans 1

Concept Trans 2

DFS Trans 1

DFS Trans 2

DFS Trans 3

DFS Trans 4

Vocab1

economic system: way in which a nation uses its resources to satisfy its people’s needs and wants

Vocab2

traditional economy: system in which economic decisions are based on customs and beliefs that have been handed down from generation to generation

Vocab3

command economy: system in which the government controls the factors of production and makes all decisions about their use

Vocab4

market economy: system in which individuals own the factors of production and make economic decisions through free interaction while looking out for their own and their families’ best interests

Vocab5

market: the process of freely exchanging goods and services between buyers and sellers

Vocab6

circular flow of income and output: economic model that pictures income as flowing continuously between businesses and consumers

Vocab7

mixed economy: system combining characteristics of more than one type of economy

Vocab8

capitalism: economic system in which private individuals own the factors of production

Vocab9

laissez-faire: economic system in which the government minimizes its interference with the economy

Vocab10

free-enterprise system: economic system in which individuals own the factors of production and decide how to use them within legal limits; same as capitalism

Vocab11

profit: amount earned after a business subtracts its costs from its revenues

Vocab12

profit incentive: desire to make money that motivates people to produce and sell goods and services

Vocab13

competition: rivalry among producers or sellers of similar goods and services to win more business

Vocab14

private property: whatever is owned by individuals rather than by government

Vocab15

economic efficiency: wise use of available resources so as to obtain the greatest benefits possible

Vocab16

economic equity: the attempt to balance an economic policy so that everyone benefits fairly

Vocab17

standard of living: the material well-being of an individual, group, or nation, measured by how well their necessities and luxuries are satisfied

Vocab18

economic growth: expansion of the economy to produce more goods, jobs, and wealth

Vocab19

socialism: a system in which the government owns the major factors of production and attempts to manage output and the distribution of goods

Vocab20

proletariat: term Karl Marx used to refer to workers

Vocab21

communism: term used by Karl Marx for his idealized society in which no government is necessary

Vocab22

democratic socialism: system that works within the constitutional framework of a nation to elect socialists to office; the government usually controls only some areas of the economy

Vocab23

authoritarian socialism: system that supports revolution as a means to overthrow capitalism and bring about socialist goals; the entire economy is controlled by a central government; also called communism

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