the american economic system basic economic unit part ii
TRANSCRIPT
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The American Economic System
Basic Economic Unit Part II
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Types of Economic Systems
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Traditional
Characteristics: Little Change Based on Custom
How answer the economic questions? How they always
have
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Command
Characteristics Government
controls means of production
Little individual influence
Communism & Socialism
How answer the economic questions? Government does
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Socialism
Gov. owns some factors of production and distributes products and wages
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Communism
Socialism under the dictatorship of the communist party
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Market
Characteristics: Private
individuals control the factors of production
Individual freedom
How questions answered? By businesses
and consumers
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Mixed
Characteristics: Some individual freedom some
government control
How are questions answered? Individuals do but have some
government intervention
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All economies are actually mixed. What determines whether an economy is considered market or command depends on the level of
Government involvement.
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Who developed the principles of a market economy?
Adam Smith
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What was the Wealth of Nations?
Smith’s book that explained the principles of Capitalism
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What did Smith mean by Laissez-faire economics?
“To let alone” Government
should stay out of marketplace except to ensure competition
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The Invisible Hand
Belief that individuals on their own would work for own self-interest
Would be guided by “invisible hand” to use resources efficiently
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Characteristics of Market/Free Enterprise System
Little or no government intervention – governments role in econ. is to ensure competition
Free Enterprise – Competition with little gov. interference
Freedom of Choice – individuals can choose what work to do and what we buy
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Characteristics Continued
Private Property – right to own and use our property as we choose within certain legal limits
Profit Incentive – the driving force of capitalism, the ability to accumulate wealth
Competition – the struggle between buyers and sellers to get the best products at lowest prices
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What does the Circular Flow Model illustrate?
How resources, goods and services, and money flow in a circular pattern
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Market
The exchange of goods and services between buyers and sellers
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Factor Market
Where productive resources (the factors of production) are bought and sold
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Product Market
Market where goods and services (finished products) are offered for sale
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What happens when less is exchanged in the circular flow?
The economy shrinks, productivity goes down
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What happens when more is exchanged?
Economy grows, productivity increases
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What is productivity?
The amount of output that can be produced by a set amount of resources in a given period of time
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Productivity
Goes up when can produce the same amount of output in less time
Or
When can produce more output with same amount of resources in same time
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Increasing Productivity
Specialization when people, businesses or countries focus on what they do best
Division of Labor breaking down of a job into small parts performed by different workers
Investing in Human Capital spending to improve worker skills
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What do these practices create between individuals, communities and nations?
Economic Interdependence creates dependence between people for goods and services