Chapter 6

1
Chapter 6 Economic Systems

• Economic Systems and How they Work

2
Review of Major Concepts

• Economic Systems
• This information will help broaden your
  understanding of how economics works

3
Why does it matter?

• Economics is the language of power in our culture
• Money disputes are the number one cause of
  discord in our homes!
• We live in an age of capitalism and market-driven
  decision making by govts

4

• Define economic system

5

• Way in which a nation uses its resources to
  satisfy its peoples needs and wants

6

• What three questions must all economic systems
  answer?

7

• What should be produced?
• How should it be produced?
• For whom should it be produced?

8

• Does a pure economic system really exist?

9

• No- they are all mixed economies to some degree
• Can you explain how this is so?

10

• Every economy is influenced by the government
  govt has some role to play even if its a small
  role.
• Even hard core communist societies allowed some
  sense of individualism and private propery

11

• What are the major types of economic systems and
  their differences?

12

• Traditional
• Command
• Market
• Mixed

13

• Define traditional economy

14

• System in which economic decisions are based on
  customs and beliefs that have been handed down
  from generation to generation

15

• Traditional
• Answers the three basic questions according to
  tradition
• Things are done, the way they have always been
  done.
• Economic decisions are based on customs and
  beliefs-often religious- handed down from
  generation to generation

16

• Traditional
• Examples
• Inuit of North America
• San of the Kalahari in Africa
• Aborigines of Australia

17

• Traditional
• Advantages
• Everyone knows their role
• Little uncertainty of what and how to produce,
  for whom is usually themselves

18

• Traditional
• Disadvantages
• Discourages new ideas/technology
• Punishes people who break rules
• Lower standard of living

19

• Define command economy

20

• System in which the government controls the
  factors of production and makes all decisions
  about their use

21

• Command
• Government decides questions of production
• Example Former USSR , Cuba, North Korea, and
  China

22

• Command
• Advantages
• Speed in which resources can be re-routed
  (agriculture to industry)
• Very secure - decisions made for you, no
  uncertainty about what to do
• Some education, healthcare, public services,
  available at little or no cost
• Strong commitment to EQUALITY of citizens

23

• Command
• Disadvantages
• Not designed for consumer wants - only basic
  needs provided
• Sacrifice personal gain for the good of the state
  and benefit for future generations
• No financial incentive for hard work
• Not much flexibility or creativity

24

• Command
• Disadvantages
• Large bureaucracy (bloated, expensive)
• Individual abilities not considered people do
  what ever job the govt needs
• All change is top down and enforced by state
  often results in brutal oppression

25

• Command
• Disadvantages
• Little flexibility-discourages change
• Individual abilities not considered
• All change is top down and enforced by state
  often results in brutal oppression

26

• Define market system

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• 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

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• Market
• People and firms act in their own best interests
• Allow buyers/sellers to come together to exchange
  goods or services
• Ex. U.S., Japan, Germany

29

• Define market

30

• Freely chosen activity between buyers and sellers
  of goods and services

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• Market
• Advantages
• Over time can adjust to change
• Individual freedom
• Little government interference
• Decentralized decision making

32

• Market
• Advantages
• Variety of goods and services
• High consumer satisfaction
• Freedom to chose career, spend their income how
  they wish, own private property, take risks and
  earn profits

33

• Define circular flow of economic activity

34

• Economic model that pictures income as flowing
  continuously between businesses and consumers

35

• Market
• Disadvantages
• Doesnt provide for basic needs of all members
• Doesnt provide enough services people highly
  value

36

• Market
• Disadvantages
• High degree of uncertainty for workers and
  business

37

• Market
• Disadvantages
• Can fail if three conditions are not met
• Reasonably competitive markets
• Resources able to move from one activity to
  another
• Consumer access to information to make wise
  choices
• Government helps to ensure these

38

• Define mixed economy

39

• System combining characteristics of more than one
  type of economy

40

• Mixed
• Combines the basic elements of a pure market
  economy and a command economy

41
Section 2

• Characteristics of the American Economy

42

• Identify and explain the six major
  characteristics of a pure market economy?

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• The six characteristics of a pure market economy
• Little or no government control
• Freedom of enterprise
• Freedom of choice
• Private property
• The profit incentive
• Competition

44

• Explain why a pure market economic system
• Requires little or no government control.

45

• Adam Smith Scottish economist Father of
  capitalist/market theory
• believed Govt should not interfere with
  economic activity unless absolutely necessary
  (referee)

46

• Smith on Minimal Govt Role
• Stated that individuals left alone by govt
  would work for their own self-interest
• They would then be guided by self-interest to
  use resources efficiently and thus achieve the
  maximum good for society

47

• Smith on Minimal Govt Rolecontd
• Individual self-interest will regulate the
  economy
• Smith called this regulating force the
  INVISIBLE HAND which caused economy to run
  efficiently
• generates tons of wealth for middle classes

48

• Identify the term used to explain Smiths version
  of the ideal economic system.

49

• Capitalism

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• Define capitalism

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• Economic system in which private individuals own
  the factors of production and decide how to use
  them within legislated limits
• Land, Labour Capital Resources are combined
  to produce stuff. These are the factors or
  means of production

52

• The government lets people and businesses make
  their own economic decisions w/o excessive govt
  interference

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• Identify the other term used for pure capitalism.

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• Laissez-faire system

55

• Define laissez-faire

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• Leave it Alone
• Economic system in which the government minimizes
  its interference with the economy

57

• Free Enterprise system
• The American economy is also called a free
  enterprise system

58

• Define free enterprise system

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• Economic system in which individuals own the
  factors of production and decide how to use them
  within legal limits same as capitalism

60

• Freedom of Choice
• Buyers, not sellers, make the decisions about
  what should be produced

61

• Private Property
• One of the most important characteristics of
  capitalism

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• Define private property

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• Whatever is owned by individuals rather than by
  government

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• Define profit

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• Money left after all the costs of
  production-wages, rents, interests, and
  taxes-have been paid

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• Define profit incentive

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• Desire to make money that motivates people to
  produce and sell goods and services

68

• Profit Incentive
• When a person invests time, know-how, money, and
  other capital resources in a business, the goal
  is to make a profit
• The desire of profit incentive motivates
  entrepreneurs to establish new business and
  produce new kinds of goods and services

69

• Define competition

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• Rivalry among producers or sellers of similar
  goods and services to get more of the market
  share more customers and more money!

71

• Competition
• Encouraged by the lure of profits
• Leads to an efficient use of resources
• Forces businesses to keep their production costs
  as low as possible
• For competition to exist, consumers must act out
  of self-interest desire for best product _at_
  cheapest price

72

• Explain how the government sometimes restricts
  free enterprise in a market economy

73

• Govt Restrictions if a Market Economy
• Zoning regulations, child-labor laws , hazardous
  waste disposal rules, and other regulations
• All limit free-enterprise to protect you

74

• Limited Role of Government
• Since the 1880s, the role of government-federal,
  state, and local-has increased

75

• Explain how the governments role over the
  economy has increased since the 1880s

76

• Federal agencies regulate the quality of various
  foods and drugs, watch over the nations money,
  and banking system, inspect workplaces for
  hazardous conditions, and guard against damage to
  the environment

77

• The federal government also uses tax revenues to
  provide social programs such as Social Security
  and Medicare
• State and local government have expanded their
  roles in such areas as education, job training,
  recreation, and care for the elderly.

78

• Describe the rights of property.

79

• The rights of humans to risk investment, own and
  produce assets, learn new ways of producing, and
  enjoy the benefits if these choices result in
  profits

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Section 3

• The Goals of the Nation

81

• Identify the goals of free enterprise.

82

• Goals of free enterprise
• Economic Freedom
• Economic Efficiency
• Economic Equity
• Economic Security
• Economic Stability
• Economic Growth

83

• Economic Freedom
• Goal To allow each member of society to make
  choices

84

• Which country has the highest degree of economic
  freedom?

85

• United States of America

86

• Identify the consequences of economic freedom.

87

• If a business fails, the government wont help out

88

• Economic Efficiency
• Wise use of available resources so that costs do
  not exceed benefits
• We must always be watchful that the costs of our
  economic actions do not exceed the benefits

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• Economic Equity
• The attempt to balance an economic policy so that
  everyone benefits faily

90

• Economic Security
• Security is provided through a number of
  government social programs

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• Economic Stability
• Goal To reduce the extreme ups and downs in the
  standard of living
• The standard of living is measured by the average
  value of goods and services used by the average
  citizen during a given period of time

92

• Define standard of living

93

• The material well-being of an individual, group,
  or nation measured by how well their necessities
  and luxuries are satisfied

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• Economic Growth
• Expansion of the economy to produce more goods,
  jobs, and wealth

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• What is required to for a nation to achieve
  economic goals?

96

• Trade-offs
• Because resources are limited (scarcity)
  compromises must be made about spending (eg.
  Hospitals or fighter jets? Welfare or tax cuts?)
• Compromises between what govt VS individuals
  want/need

97

• Explain the responsibilities associated with a
  well-functioning free enterprise system.

98

• Individual responsibilities
• Ability to support yourself and your family
• Responsibility to use your education in a
  reasonable manner that helps you become a
  productive member of the free enterprise system

99

• Individual responsibilities
• Individuals have the responsibility of electing
  responsible government officials