Unit IXUnit IX

Our American Our American Economic SystemEconomic System

Standard of LivingStandard of Living: the well being of a : the well being of a nation’s population based on the nation’s population based on the amount of goods and services they can amount of goods and services they can afford. afford.

Economic System/EconomyEconomic System/Economy: is a : is a nation’s method of caring for the nation’s method of caring for the material needs of its people.material needs of its people.

http://www.tutor2u.net/economics/content/topics/livingstandards/measuring_sol.htm

I. How The American Economic I. How The American Economic System WorksSystem Works

A.A. Our Economic FreedomOur Economic Freedom1.1. Freedom to buy and sell – FREE MARKETFreedom to buy and sell – FREE MARKET2.2. Freedom to compete – FREE COMPETITIONFreedom to compete – FREE COMPETITION3.3. Freedom to earn a livingFreedom to earn a living4.4. Freedom to earn a profitFreedom to earn a profit

a)a) PROFITPROFIT – make more money than it costs to run – make more money than it costs to run the business.the business.

b)b) INVESTINVEST – put money into business, in the hopes of – put money into business, in the hopes of making a profit.making a profit.

c)c) PROFIT MOTIVEPROFIT MOTIVE – use money they saved to – use money they saved to make more money.make more money.

5.5. Freedom to own propertyFreedom to own propertya)a) COPYRIGHTCOPYRIGHT – an exclusive right, granted by – an exclusive right, granted by

law, to publish or sell a written, musical, or art law, to publish or sell a written, musical, or art work for a certain number of years.work for a certain number of years.

b)b) PATENTPATENT – gives a person the exclusive right – gives a person the exclusive right to make and sell an invention for a certain to make and sell an invention for a certain number of years.number of years.

http://www.whatiscopyright.org/

http://www.uspto.gov/

B.B. The Free Economy in ActionThe Free Economy in Action1.1. The American economic system, like all The American economic system, like all

economic systems, must deal economic systems, must deal w/w/SCARCITYSCARCITY – limited resources vs. – limited resources vs. unlimited wants.unlimited wants.

2.2. In the U.S. there are millions of In the U.S. there are millions of businesses that are free to produce all businesses that are free to produce all kinds of goods and as many as they kinds of goods and as many as they want.want.

3.3. There are about 100 million people who There are about 100 million people who have jobs that produce goods and have jobs that produce goods and services.services.

4.4. Nobody sets limits on the amount of Nobody sets limits on the amount of goods and services produced.goods and services produced.

5.5. Even w/o supervision enough goods are Even w/o supervision enough goods are produced. There are very few shortages. produced. There are very few shortages.

C.C. Supply and DemandSupply and Demand1.1. LAW OF SUPPLY & DEMANDLAW OF SUPPLY & DEMAND – sets – sets

prices for goods and services.prices for goods and services.

2.2. LAW OF DEMANDLAW OF DEMAND – price down, – price down, consumer buying up….price up, consumer consumer buying up….price up, consumer buying down.buying down.

3.3. LAW OF SUPPLYLAW OF SUPPLY – price increases, – price increases, sellers provide more goods….price sellers provide more goods….price decreases, sellers provide fewer goods.decreases, sellers provide fewer goods.

4.4. OPPORTUNITY COSTSOPPORTUNITY COSTS – what you give – what you give up in order to get something. Trade-offs. up in order to get something. Trade-offs.

Supply & DemandSupply & Demand

D.D. What is Capitalism?What is Capitalism?1.1. CAPITALISMCAPITALISM is another name for the is another name for the

American economic system.American economic system.

2.2. CAPITALCAPITAL – the money Americans use to – the money Americans use to invest in business or the items they buy invest in business or the items they buy such as tools, machines, buildings & such as tools, machines, buildings & property which is used to produce goods property which is used to produce goods and services.and services.

3.3. CAPITALISTCAPITALIST – is anyone who owns part – is anyone who owns part or all of a business.or all of a business.

4.4. An electrician & an automobile An electrician & an automobile manufacturer are both capitalists.manufacturer are both capitalists.

5.5. A capitalist is also someone who buys A capitalist is also someone who buys STOCKSTOCK – which is part ownership of a – which is part ownership of a large business (SEARS, GM, IBM, & large business (SEARS, GM, IBM, & FOODLION). FOODLION).

6.6. People work & invest to produce new & People work & invest to produce new & better goods at a price people are willing better goods at a price people are willing to pay in order to make a profit. to pay in order to make a profit.

1957

Salisbury, North Carolina

Founded

Location

http://www.foodlion.com/

Website

E.E. Our Free Enterprise Our Free Enterprise SystemSystem

1.1. People in the U.S. are People in the U.S. are basically free to run their basically free to run their business as they see fit, business as they see fit, based on their ability & based on their ability & energy that is why it is energy that is why it is called the called the FREE FREE ENTERPRISE ENTERPRISE SYSTEMSYSTEM. .

2.2. American businesses American businesses take many risks to make take many risks to make a profit, but they are a profit, but they are also required to take also required to take losses if they make losses if they make mistakes. mistakes.

3.3. They must provide They must provide a service or good a service or good that is in demand & that is in demand & produce it produce it efficiently to keep efficiently to keep prices down to prices down to where people will where people will purchase it.purchase it.

4.4. Mistakes can force Mistakes can force you out of you out of business. business.

F.F. The Rise of Big BusinessThe Rise of Big Business1.1. Early businesses were small & privately Early businesses were small & privately

owned; all decisions were made by the owned; all decisions were made by the owner.owner.

2.2. 1860’s big business developed.1860’s big business developed.

3.3. These big businesses benefited from new These big businesses benefited from new American technology.American technology.

4.4. The use of steam or electricity to power The use of steam or electricity to power machines that were placed in factories machines that were placed in factories where many workers were employed.where many workers were employed.

5.5. They produced large quantities of goods They produced large quantities of goods at lower prices & made huge profits.at lower prices & made huge profits.

6.6. Many used business practices that today Many used business practices that today would be considered illegal.would be considered illegal.

G.G. MonopoliesMonopolies1.1. Unfair business practices harm our free Unfair business practices harm our free

economy. economy.

2.2. During the late 1800s & early 1900s an During the late 1800s & early 1900s an unfair method was forming of a unfair method was forming of a MONOPOLYMONOPOLY – the only firm selling a – the only firm selling a product or service. product or service.

3.3. If it is something people If it is something people really need, like food, the really need, like food, the monopolist controls the monopolist controls the prices.prices.

4.4. A A MERGERMERGER is when two is when two or more companies in the or more companies in the same industry combine to same industry combine to make one company. make one company.

5.5. A A TRUSTTRUST is another way is another way to form a monopoly. This to form a monopoly. This is when several is when several companies in a similar companies in a similar industry place all their industry place all their stock in the hand of a stock in the hand of a board of trustees, which board of trustees, which makes sure that the makes sure that the companies no longer companies no longer compete.compete.

John D. Rockefeller

Standard Oil Company Leader

H.H. The Importance of Big BusinessThe Importance of Big Business1.1. Big businesses today are not monopolies; Big businesses today are not monopolies;

they have to compete w/other big they have to compete w/other big businesses.businesses.

2.2. If a company makes a lot of profit then If a company makes a lot of profit then soon other big businesses will develop to soon other big businesses will develop to try to get a share of the profits.try to get a share of the profits.

3.3. Many big companies don’t always make a Many big companies don’t always make a lot of profit or abuse their power.lot of profit or abuse their power.

4.4. Big business is needed in the economy to Big business is needed in the economy to make items only big businesses could make items only big businesses could (steel, cars, electricity, ships).(steel, cars, electricity, ships).

5.5. ““Economies of Scale” – when things can Economies of Scale” – when things can be produced more cheaply & efficiently be produced more cheaply & efficiently by big business.by big business.

6.6. There are laws to prevent large There are laws to prevent large companies from getting together & setting companies from getting together & setting prices for good & services.prices for good & services.

I.I. The Government as RefereeThe Government as Referee1.1. The government acts as a referee to The government acts as a referee to

protect the American system of free protect the American system of free enterprise.enterprise.

2.2. To prevent monopolies, Congress has To prevent monopolies, Congress has passed antitrust & antimonopoly laws.passed antitrust & antimonopoly laws.

a)a) SHERMAN ANTITRUST ACT 1890SHERMAN ANTITRUST ACT 1890

b)b) CLAYTON ACT 1914CLAYTON ACT 1914

3.3. CONGLOMERATESCONGLOMERATES – are big business – are big business that combine & produce, supply & sell that combine & produce, supply & sell unrelated products or services unrelated products or services (communications, insurance, & (communications, insurance, & restaurants).restaurants).

4.4. The government watches mergers The government watches mergers carefully to make sure that free enterprise carefully to make sure that free enterprise is not threatened. is not threatened.

5.5. Some industries are allowed to be Some industries are allowed to be monopolies such as monopolies such as PUBLIC UTILITESPUBLIC UTILITES – – telephone, electric, water, they are telephone, electric, water, they are regulated by the gov’tregulated by the gov’t

J.J. Comparing Economic SystemsComparing Economic Systems1.1. Some people now call our economy a Some people now call our economy a

MIXED ECONOMYMIXED ECONOMY, since gov’t acts as a , since gov’t acts as a referee in our free enterprise system.referee in our free enterprise system.

2.2. The Soviet Union The Soviet Union used to be a used to be a COMMAND COMMAND ECONOMYECONOMY since since the gov’t made just the gov’t made just about all of the about all of the decisions & left decisions & left none for individuals.none for individuals.

3.3. The gov’t tells how The gov’t tells how much of an item much of an item must be produced & must be produced & if it isn’t then wages if it isn’t then wages are cut.are cut.

II. How American Business Is II. How American Business Is OrganizedOrganized

A.A. The Single ProprietorshipThe Single Proprietorship1.1. Over 11 million small businesses owned by Over 11 million small businesses owned by

1 person (gas stations, beauty shops) called 1 person (gas stations, beauty shops) called SINGLE PROPRIETORSHIPSINGLE PROPRIETORSHIP. .

2.2. AdvantagesAdvantages

a.a. Own bossOwn boss

b.b. They decide what to sellThey decide what to sell

c.c. They decide hours of businessThey decide hours of business

d.d. They take all the profitsThey take all the profits

3.3. DisadvantagesDisadvantages

a.a. Must furnish all the Must furnish all the money for rent, money for rent, equipment, buildings.equipment, buildings.

b.b. If help is needed, must If help is needed, must pay salaries.pay salaries.

c.c. If business fails they If business fails they take the losses.take the losses.

B.B. PartnershipPartnership

1.1. PARTNERSHIPPARTNERSHIP – two – two people who become part people who become part owners to start their own owners to start their own business.business.

2.2. More people to provide More people to provide capital for equipment, capital for equipment, rent, buildings, come up rent, buildings, come up w/ideas.w/ideas.

3.3. Usually an agreement is Usually an agreement is signed to set up the signed to set up the partnershippartnership

4.4. Unwritten partnership Unwritten partnership agreements are recognized agreements are recognized by the courts.by the courts.

C.C. The CorporationThe Corporation1.1. CORPORATIONCORPORATION – a form of – a form of

business organization that business organization that requires a lot of money for requires a lot of money for buildings, land, offices, buildings, land, offices, factories, tools, machines & factories, tools, machines & employ workers.employ workers.

2.2. Corporations are permanent Corporations are permanent 3.3. THEY RAISE MONEY BY THEY RAISE MONEY BY

SELLING STOCKS OR SELLING STOCKS OR SHARES OR OWNERSHIPSHARES OR OWNERSHIP

STOCKHOLDERSSTOCKHOLDERS – people who – people who buy stock.buy stock.DIVIDENDSDIVIDENDS – profits paid to – profits paid to stockholders. stockholders.

4.4. THE CORPORATION THE CORPORATION RECEIVES ITS RIGHT TO RECEIVES ITS RIGHT TO OPERATE FROM A STATE OPERATE FROM A STATE GOV’T GOV’T

CHARTERCHARTER – a grant of – a grant of incorporation from a state. incorporation from a state.

5.5. THE DIRECTORS OF THE CORPORATION THE DIRECTORS OF THE CORPORATION ARE ELECTED BY THE STOCKHOLDERS.ARE ELECTED BY THE STOCKHOLDERS.

THE BOARD OF DIRECTORSTHE BOARD OF DIRECTORS – elected by the – elected by the annual meeting of stockholders, to run the annual meeting of stockholders, to run the corporation. corporation.

6.6. THE BOARD OF DIRECTORS CHOOSES THE BOARD OF DIRECTORS CHOOSES THOSE WHO MANAGE THE THOSE WHO MANAGE THE CORPORATION. CORPORATION.

EXECUTIVESEXECUTIVES – manage the affairs – manage the affairsMANAGEMENTMANAGEMENT – all the Presidents, Vice – all the Presidents, Vice Presidents, Secretary, & TreasurerPresidents, Secretary, & Treasurer

7.7. INDIVIDUALS ARE NOT INDIVIDUALS ARE NOT RESPONSIBLE FOR RESPONSIBLE FOR THE DEBTS OF THE THE DEBTS OF THE CORPORATION. CORPORATION.

The stockholders are The stockholders are not responsible for any not responsible for any losses the corporation losses the corporation may have. The only may have. The only thing they risk is the thing they risk is the cost of their stock.cost of their stock.

8.8. If a corporation fails, its If a corporation fails, its assets are sold & used to assets are sold & used to pay off any debts pay off any debts remaining. remaining.

D.D. Preferred & Common StockPreferred & Common Stock1.1. PREFERRED STOCKPREFERRED STOCK – take less risk, as – take less risk, as

long as profits are made they receive long as profits are made they receive dividends before any other stockholders. dividends before any other stockholders.

2.2. Because they take less risk, they usually Because they take less risk, they usually don’t get the voting privilege.don’t get the voting privilege.

3.3. COMMON STOCKCOMMON STOCK – take more risk & – take more risk & receive dividends only if company makes receive dividends only if company makes good profit. good profit.

4.4. Main advantages of owning common stockMain advantages of owning common stocka.a. Company profits high, dividends are higherCompany profits high, dividends are higherb.b. Company profits high, market price or selling Company profits high, market price or selling

price of stock is highprice of stock is highc.c. Common stock owners have a vote in electing Common stock owners have a vote in electing

board of directors.board of directors.

E.E. Corporation BondsCorporation Bonds1.1. BONDSBONDS – when corporations borrow money – when corporations borrow money

they sell bonds. they sell bonds. 2.2. INTERESTINTEREST – amount of money corporations – amount of money corporations

pay you for buying a bond.pay you for buying a bond.3.3. If a company cannot pay the bond on the If a company cannot pay the bond on the

assigned date, the bondholders can take assigned date, the bondholders can take over the business & sell it to raise money.over the business & sell it to raise money.

III. How Business Decisions Are III. How Business Decisions Are MadeMade

No matter how a business is organized, its No matter how a business is organized, its success depends mainly upon decisions success depends mainly upon decisions about the use of the about the use of the FACTORS OF FACTORS OF PRODUCTIONPRODUCTION – land, labor, capital, & – land, labor, capital, & management. management.

A.A. Production Requires LandProduction Requires Land1.1. LANDLAND – a place to locate a store, factory or – a place to locate a store, factory or

office. office.

2.2. It also includes all natural resources that It also includes all natural resources that come from land. come from land.

3.3. Must decide whether to buy the land or Must decide whether to buy the land or RENTRENT – pay someone to use the land. – pay someone to use the land.

4.4. Cost of rent is determined by location of Cost of rent is determined by location of property. property.

B.B. Production Requires Production Requires CapitalCapital

1.1. Capital is the money Capital is the money used to pay for tools, used to pay for tools, trucks, machines, trucks, machines, buildings.buildings.

2.2. You can get capital You can get capital by saving or getting by saving or getting a loan if the bank a loan if the bank determines you are determines you are a good risk.a good risk.

3.3. Other ways would be Other ways would be to start it as a to start it as a partnership or partnership or corporation. corporation.

C.C. Production Requires LaborProduction Requires Labor1.1. LABORLABOR – all human effort to produce goods – all human effort to produce goods

& services (workers).& services (workers).2.2. WAGESWAGES – money earned by workers hourly, – money earned by workers hourly,

daily, weekly.daily, weekly.3.3. SALARIESSALARIES – fixed income paid twice a – fixed income paid twice a

month or monthly, usually management.month or monthly, usually management.

4.4. Work by yourself limits what can be Work by yourself limits what can be produced.produced.

Workers produce more which creates more Workers produce more which creates more money to pay for the additional help & increase money to pay for the additional help & increase profits.profits.

5.5. PRODUCTIVITYPRODUCTIVITY – the amount a worker – the amount a worker produces an hour.produces an hour.

D.D. Production Requires Good ManagementProduction Requires Good Management1.1. ENTEPRENEURSENTEPRENEURS – or business owners – or business owners

must make decisions about land, labor, & must make decisions about land, labor, & capital. capital.

2.2. MANAGERSMANAGERS – operate business. A group of – operate business. A group of managers in a single business make up managers in a single business make up management.management.

3.3. They make decisions that will determine if They make decisions that will determine if the business makes it or fails.the business makes it or fails.

4.4. They take risks & w/o risks our standard of They take risks & w/o risks our standard of living would not be as high (electricity, mass living would not be as high (electricity, mass production, assembly line). production, assembly line).

E.E. Management & ProfitsManagement & Profits

1.1. Management takes Management takes risks in the hopes of risks in the hopes of producing profits. producing profits.

2.2. GROSS INCOMEGROSS INCOME – – the money a the money a company receives company receives from the sale of its from the sale of its goods & services.goods & services.

3.3. Then materials, rent, Then materials, rent, property taxes, repair property taxes, repair of machines.of machines.

4.4. Agencies such as Agencies such as the Small business the Small business Administration help Administration help small businesses get small businesses get started. started.

5.5. They set labor laws, They set labor laws, prevent prevent discrimination, discrimination, prevent pollution, prevent pollution, protect health & protect health & safety of the safety of the workers. workers.

http://www.sba.gov/