What is an Economy?Free Enterprise SystemStandard 1 Objective 2

What is an Economy?

•An ECOMONY, or ECONOMIC SYSTEM, is the ways a nation makes economic choices about how the nation will use its resources to produce and distribute goods and services.

Economic SystemsTraditional – An economic system in which habits, traditions, and rituals answer the basic questions of what, how, and for whom.

Command – A system in which a country’s government makes all economic decisions regarding what, how, and for whom goods and services will be produced and distributed.

Market – In a pure market economy, there is no government involvement in economic decisions. Individuals and companies own the means of production and businesses compete for consumers. The market answers what, how, and for whom.

Mixed – An economy with elements of both command and market. Individuals, companies, and government decide what, how, and for whom goods and services will be produced and distributed.

Limited Resources

•Nations must answer 3 basic questions when deciding how to use their limited resources. The way nations answer these questions defines their economic systems.1. What goods and services should be

produced?2. How should the goods and services be

produced?3. For whom should the goods and services

be produced?

Free Enterprise System

The Free Enterprise System is an economic system in which the means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment of profits gained in a free market.

-American Heritage Dictionary

The Free Enterprise System is a political and economic philosophy often referred to as capitalism.

Four Pillars of the Free Enterprise System

•Private Property

•Price System

•Competition

•Entrepreneurship

WHAT????

•WHAT? Consumers decide what should be produced in a market economy through the purchases they make.

HOW????

•HOW? Production is left entirely up to businesses. Businesses must be competitive in such an economy and produce quality products at lower prices than their competitors.

FOR WHOM????

•FOR WHOM? In a market economy, the people who have more money are able to buy more goods and services. To obtain money, people are motivated to work.

Free Enterprise System

•Features private ownership of businesses and marketplace competition.

•Government cares for its people, but with limited number of social services.

•Political system most associated with – Democracy

•Country Examples: United States and Japan