Responsibility, Choice and Change

Chapter 2 = Economic Systems & Decisions

Section 1: Economic Systems

• Understand different types of economic systems that govern WHAT goods and services to produce, HOW to produce them, and FOR WHOM to produce them.

Section 3: American Free Enterprise

• Understand that 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.

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Learning goals:

• Explain why every society has an economic system to allocate goods and services.

• Explain the advantages and disadvantages of the types of economic systems.

• Explain the advantages and disadvantages of mixed economies.

• Describe the characteristics of free enterprise capitalism.

• Describe the roles government, consumers and entrepreneurs play in free enterprise capitalism.

Content Vocabulary = section 1

• economic system

• traditional economy

• command economy

• market economy

• market

• capitalism

• mixed economy

• socialism

• communism

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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?

How are you involved?

DO NOW: Create a chart in your groups that lists the rights and responsibilities of people in your school district to meet the needs of education.

Section 1

Economic Systems

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

– Traditional

– Command

– Market

• Most economies combine elements of the three.

• Three major economic systems exist:

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Section 1

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

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

• Advantages

–Everyone knows which role to play.

–Little uncertainty on what or how to produce.

–Customs and traditions determine who is provided for.

• 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 6

Section 1

Command Economies Understand that: Command economies rely on a central authority to make most of the economic decisions.

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

• Advantages

–Can change direction drastically through emphasizing/allocation

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

• Disadvantages

–Basic wants and needs of consumers are ignored.

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

–Large decision-making bureaucracy lacks flexibility.

–Severely limits private property rights

–Individual freedom and initiative are limited. 7

Section 1

Market Economies

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

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.

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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

• 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.)

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Section 1

Mixed Economies

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

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.

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

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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.

• 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.)

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Section 3-Key Terms

Content Vocabulary = Section 3

• free enterprise

• voluntary exchange

• private property rights

• profit

• profit motive

• competition

• consumer sovereignty

• mixed or modified free enterprise economy

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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.

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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.)

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Section 3

Characteristics of Free Enterprise Capitalism

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

There are 5 major characteristics of a free enterprise economy:

• Economic freedom

• Voluntary exchange

• Private property rights

• Private property gives individuals incentive to work, save, and invest.

• Profit motive

• People are free to take risks to earn a profit.

• Competition

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Section 3

The Role of the Entrepreneur Understand that: Entrepreneurs are the driving force of the free enterprise system. They:

–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

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

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

– New products

– Greater competition

– More production

– Higher quality

– Lower prices for consumers 16

Section 3

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

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

• Consumers are always looking for new ideas and products.

The Role of the Consumer

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Section 3

The Role of the Government

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

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

• Government has become a protector, provider, regulator, and consumer

• 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.

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

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

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Economic Systems Most countries have a mix of three different types of economic systems.

VS 1

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VS 2

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

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Figure 2

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VS 3

Free Enterprise The U.S. economic system is based on the free enterprise system and is characterized by competition and private ownership of resources.

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Figure 3

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