Splash Screen

Chapter Intro 1

Take a closer look at the way your high school is organized. Who makes the decisions on lesson plans? Who plans out events that take place during the year? Who makes financial decisions, and how? Are parents and voters involved in the educational system? Obtain information from your school district office or the library to create a chart that lists the rights and responsibilities of people in your school district to meet the needs of education. Read Chapter 2 to learn about the different economic systems that societies set up to meet their specific economic needs.

Chapter Intro 2

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

Section 1-Preview

Section Preview

In this section, you will learn about the different types of economic systems that govern WHAT goods and services to produce, HOW to produce them, and FOR WHOM to produce them.

Section 1-Key Terms

Content Vocabulary

• economic system

• traditional economy

• command economy

• market economy

• market

• capitalism

• mixed economy

Academic Vocabulary

• stagnation

• allocate

• emphasizing

• socialism

• communism

Economic Systems

• All societies use an economic system to provide for needs and wants of their people.

– Traditional

– Command

– Market

• Three major economic systems exist:

Comparing Economic Systems

Economic Systems

What to produce?

How to produce it?

For whom to produce?

Traditional

Command

Market

Section 1

Economic Systems (cont.)

• Most economies combine elements of the three.

Comparing Economic Systems

Section 1

Traditional Economies

Traditional societies use ritual, habit, or customs to answer the basic questions of WHAT, HOW, and FOR WHOM to produce.

Section 1

• A traditional economy—use of scarce resources and economic activity is based on habit or custom.

Traditional Economies (cont.)

Section 1

• Advantages

– Everyone knows which role to play.

– Little uncertainty on what or how to produce.

–Some people are more comfortable with traditions as opposed to the “new”

– Customs and traditions determine who is provided for.

Traditional Economies (cont.)

Section 1

• Disadvantages

– Individuals generally not free to make decisions

– New ideas discouraged, leading to stagnation and a lower standard of living

– Strict rules defined by elders and ancestors

– Often live at subsistence level- on the edge of survival

Traditional Economies (cont.)

Section 1

Command Economies

Command economies rely on a central authority to make most of the economic decisions.

Section 1

• A central authority makes the major decisions in a command economy.

Command Economies (cont.)

Section 1

• Advantages

– Can change direction drastically through emphasizing/allocation

– Health and public services available to everyone at little or no cost

– “Make the trains run on time”

Command Economies (cont.)

Section 1

• Disadvantages– Basic wants and needs of consumers

are ignored.

–Elite may get enough while the common people go without

– Economies tend to be unproductive (not producing enough), not producing a good product.

– Large decision-making bureaucracy lacks flexibility, and is often corrupt.

Command Economies (cont.)

Section 1

– Severely limits private property rights

– Individual freedom and initiative are limited.

Command Economies (cont.)

Section 1

Market Economies

In a market economy, consumers and businesses jointly answer the questions of WHAT, HOW, and FOR WHOM to produce.

Section 1

• A market economy allows people to make decisions in their own best interest.

• Buyers and sellers exchange goods and services in a market.

• Market economies are based on capitalism.

• Capitalism means that the factors of production are privately owned.

Market Economies (cont.)

Section 1

• Advantages

– High degree of individual freedom

– Adjusts gradually to change over time

– Small degree of government interference

– Decision making is decentralized

– Large variety of goods and services

– High degree of consumer satisfaction

Market Economies (cont.)

Section 1

• Disadvantages

– Not everyone is provided for

– May not provide enough of some basic goods and services

– High degree of uncertainty for workers and employers

Market Economies (cont.)

Section 1

Mixed Economies

Most economies in the world today feature some mix of traditional, command, and market economies.

Section 1

• Most economies in the real world are mixed economies.

• When political systems are considered with economic systems, the picture gets more complicated.

• An example is socialism and its extreme, communism.

Mixed Economies (cont.)

The Spectrum of Mixed Economies

Section 1

• The type of political system in a mixed economy is less important than the way basic economic decisions are made.

Mixed Economies (cont.)

The Spectrum of Mixed Economies

Figure 2

Section 1

• Advantages of a mixed economy

– Provides assistance for some people who might otherwise be left out

– In a democratic society, voters use electoral power to affect WHAT, HOW, and FOR WHOM decisions.

– In a socialist society, FOR WHOM is addressed more directly by government.

Mixed Economies (cont.)

Section 1

• Disadvantages

– More services mean higher costs for citizens overall.

– In socialist countries, availability of services may be limited or quality deteriorates over time.

Mixed Economies (cont.)

Figure 1

Section 2-Preview

Section Preview

In this section, you will learn how economic freedom, economic security, and economic equity are related to the level of satisfaction people have with their economic systems.

VS 2

Economic and Social Goals In the United States, we share several economic and social goals.

Section 2-Key Terms

Content Vocabulary

• minimum wage

• Social Security

• inflation

• fixed income

Academic Vocabulary

• adverse • accommodate

Section 2

Economic and Social Goals

Americans share several major economic and social goals.

Section 2

Economic and Social Goals (cont.)

• In the United States, there are seven major economic and social goals:

– Economic freedom

– Economic equity

• Equity is  impartiality or fairness.

• The minimum wage was established on a national level.

• Many states established lemon laws.

Section 2

Economic and Social Goals (cont.)

– Economic security

• Social Security was established for disabled or retired beneficiaries.

– Full employment

Section 2

Economic and Social Goals (cont.)

– Price stability

• Inflation makes paying bills difficult for individuals on a fixed income.

• High rates of inflation discourage business activity.

– Economic growth

Section 2

• As our society evolves, more goals may become important to us.

Economic and Social Goals (cont.)

Section 2

Resolving Trade-Offs Among Goals

Conflicts among goals can be solved by comparing the cost of a goal to its benefit.

Section 2

• Individuals have different ideas on how to reach a goal or on the goal itself.

• Our economic policies have opportunity costs and trade-offs.

Resolving Trade-Offs Among Goals (cont.)

Section 2

• In many cases, trade-offs among goals are resolved when people compare their estimate of the costs to their estimate of the benefits and then vote for candidates accordingly.

• The U.S. economy is flexible enough to allow choices, accommodate compromises, and still satisfy the majority of Americans.

Resolving Trade-Offs Among Goals (cont.)

Section 3-Preview

Section Preview

In this section, you will learn how under capitalism the basic economic decisions of WHAT, HOW, and FOR WHOM to produce are made through the free interaction of individuals looking out for their own best interests.

Section 3-Key Terms

Content Vocabulary

• free enterprise

• voluntary exchange

• private property rights

• profit

• profit motive

• competition

• consumer sovereignty

Academic Vocabulary

• incentive

• catalyst

• regulator

• mixed or modified free enterprise economy

Section 3

American Free Enterprise

• In many parts of the world, capitalism has become the economic choice.

• Capitalism allows private citizens to own and use the factors of production to generate profits.

• The U.S. economy is based on free enterprise.

Characteristics of Free Enterprise Capitalism

Section 3

• Capitalism and free enterprise are often used interchangeably, although meanings are different.

– Capitalism stands for the private ownership of resources.

– Free enterprise is the unhindered use of privately owned resources to earn profits.

American Free Enterprise (cont.)

Characteristics of Free Enterprise Capitalism

Section 3

Characteristics of Free Enterprise Capitalism

The American economy incorporates the main characteristics of a free enterprise economy.

Section 3

• There are five major characteristics of a free enterprise economy:

–Economic freedom–Voluntary exchange

Characteristics of Free Enterprise Capitalism (cont.)

– Profit motive • People are free to take risks to earn a profit.

– Competition

– Private property rights • Private property gives individuals incentive to

work, save, and invest.

Figure 3

Section 3

The Role of the Entrepreneur

Entrepreneurs are the driving force of the free enterprise system.

Section 3

• Entrepreneurs

– Organize and manage land, capital, and labor to gain a profit

– Are the people who start up new businesses

– Want to “be their own boss”

– Are willing to take risks

The Role of the Entrepreneur (cont.)

Section 3

• Entrepreneurs are both the spark plug and the catalyst of the free enterprise economy.

• Their search for profits leads to a chain of events that brings

The Role of the Entrepreneur (cont.)

– New products– Greater competition– More production– Higher quality – Lower prices for consumers

Profiles in Economics:Tony HawkQuestion #7, p. 53; Tony Hawk, p. 54, #1-2

Section 3

The Role of the Consumer

The economy in the United States adapts to consumers’ wants.

Of course… wanting a good or service is not enough. To be a consumer, one must be able to PAY for the good or service.

Section 3

• Consumers ultimately determine which products are produced.

• If consumers like a new product, producers are rewarded with profits.

• Consumers not purchasing a product can cause a firm to go out of business.

The Role of the Consumer (cont.)

Section 3

• The phrase “the customer is always right” recognizes consumer sovereignty.

• Consumers are always looking for new ideas and products.

The Role of the Consumer (cont.)

Question #4, p. 53

Section 3

The Role of the Government

The economic role of the U.S. government is decided by its citizens.

Section 3

• The role of government stems from the desires, goals, and aspirations of its citizens.

The Role of the Government (cont.)

• Government has become

– A protector

– Provider

– Regulator

– Consumer

Section 3

• In general, the role of government in the economy is justified whenever the benefits outweigh the costs.

• An unintended consequence of government’s role is the emergence of the mixed or modified free enterprise economy.

The Role of the Government (cont.)

Section 3

• Some people prefer to have no government involvement in the economy—which is not possible.

• Services like a national defense and a system of laws and justice cannot be supplied by the private sector alone.

The Role of the Government (cont.)

Question #6, p. 53