chapter 2: economic systems and the american … systems and the american economy. ... • command...

Why It’s ImportantWhy do we, as American consumers, have so many choices? How is our economy different from the economies ofother countries? This chapter will explainthe different kinds of economic systems.

Chapter Overview Visit the Economics Today and Tomorrow Web site at tx.ett.glencoe.com and click on Chapter 2—Chapter Overviewsto preview chapter information.

To learn moreabout economicsystems, viewthe Economics

& You Chapter 3 video lesson:Economic Systems and theAmerican Economy

http://www.glencoe.com/sec/socialstudies/economics/econtt2003/tx/chapter2/overview.shtml

31Economic Systems and the Amer ican Economy

Terms to Know• economic system• traditional economy• command economy• market economy• market• circular flow of economic

activity• mixed economy

Reading Objectives1. What three questions must

all economic systemsanswer?

2. What are the major types ofeconomic systems and theirdifferences?

READER’S GUIDE

You probably have set some goals for your life, such as goingto college, learning a trade, or opening a business. If you wereto compare your personal goals to the goals of a Diaguita liv-

ing in Argentina or to a North Korean teenager, the lists might varywidely. One of the reasons for this variance is that each of these per-sons lives in a community or nation with a different economicsystem, or way of determining how to use resources to satisfy peo-ple’s wants and needs. In this section, you’ll learn about the differ-ent kinds of economic systems in the world.

Three Basic QuestionsAlthough nations will have different economic systems, each

system is faced with answering the same three basic questions:

1

economic system: way in whicha nation uses its resources to sat-isfy its people’s needs and wants

WE LIVE IN ARGENTINA, BY ALEX HUBER

Diaguita Indians have lived in this region for genera-tions. . . . We grow beans, corn and potatoes on themountain slopes. To irrigate these crops, we still use thechannels built centuries ago by our ancestors. We also

breed llamas. . . . In ourcommunity, the more llamasyou own, the richer you are.

. . . You can tell to whichcommunity someonebelongs by the way theydress, the color of theirclothes, and the hairstyle ofthe women.

What goods and services should be produced? How should theybe produced? Who should share in what is produced?

What Should Be Produced? As you’ve learned, we live in aworld of scarcity and trade-offs. If more of one particular item isproduced, then less of something else will be produced. If thegovernment decides to use resources to build new roads, thenfewer resources are available to maintain national parks. If acity decides to hire more police officers, fewer funds are avail-able to add teachers to classrooms. Similarly, as shown inFigure 2.1, an automobile manufacturer must decidewhether to produce pickup trucks, minivans, sports utilityvehicles, or luxury cars—and how much of each.

How Should It Be Produced? After deciding what toproduce, an economic system must then decide how thosegoods and services will be produced. Will more laborers behired? Will skilled laborers or unskilled laborers do thework? Will capital goods be used to manufacture the prod-ucts, thereby reducing the number of laborers needed? Asshown in Figure 2.2, a decision must be made as to howthe combination of available inputs will get the job donefor the least cost.

What to Produce? An automo-bile manufacturer must decide whichtypes of cars to produce with its limitedsupplies of labor, steel, rubber, and soon. Why can’t businesses or nationsproduce as much as they want?

2.12.1

How to Produce? Trade-offs exist among the available factors ofproduction. A farmer could use a horse-drawn plow to prepare a field forplanting, or instead use modern equipment. What factors must be con-sidered when deciding how to produce a good or service?

2.22.2


traditional economy: system in which economic decisions arebased on customs and beliefsthat have been handed downfrom generation to generation

For Whom Should It Be Produced? After goods or servicesare produced, the type of economic system under which people livedetermines how the goods and services will be distributed amongits members. See Figure 2.3. Who receives the new cars? Who ben-efits from a new city school? Who lives in new apartment buildings?As you will read, most goods and services in the United States aredistributed to individuals and businesses through a price system.Other economies may distribute products through majority rule, alottery, on a first-come-first-served basis, by sharing equally, by mili-tary force, and in a variety of other ways.

Types of Economic SystemsEconomists have identified four types of economic systems.

They differ from one another based on how they answer thethree basic questions of what, how, and for whom to produce.The four types of economic systems are traditional, command(or controlled), market (or capitalist), and mixed. Keep in mindthat the four systems described here are theoretical representa-tions of economies found throughout the world. No “pure” sys-tems really exist—they are all mixed economies to some degree.

Traditional System A pure traditional economy answers thethree basic questions according to tradition. In such a system,things are done “the way they have always been done.” Economicdecisions are based on customs and beliefs—often religious—handed down from generation to generation.

If you lived in a traditional economic system, your parentswould teach you to perform the same tasks that they learnedfrom their parents. As a male, for example, if your father was afisherman, you would become a fisherman. You would learn to

For Whom to Produce?In the United States economy,people’s career choices deter-mine their level of income,which in turn affects their abil-ity to purchase produced items.Do you think goods andservices should be distrib-uted in a way other thanbased on income? Explain.

2.32.3

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34 CHAPTER 2

command economy: system inwhich the government controls thefactors of production and makesall decisions about their use

make fishing nets the same way he was taught. And you woulddistribute your catch in the manner that it had always been done.

An advantage of living in a traditional economy is that youknow what is expected of you. In addition, family and communityties are usually very strong. Disadvantages include an economy inwhich change is discouraged and perhaps even punished, and onein which the methods of production are often inefficient. Conse-quently, choices among consumer goods are rare.

As Part C of Figure 2.4 shows, traditional economies exist tosome extent in very limited parts of the world today. The Inuit ofNorth America, the San of the Kalahari in Africa, and the Aboriginesof Australia are organized into traditional economic systems.

Command System The pure command economy is some-what similar to the traditional economy in that the individual haslittle, if any, influence over how the basic economic questions areanswered. In a command or controlled system, however, govern-ment leaders—not tradition—control the factors of productionand, therefore, make all decisions about their use.

Decisions in government may be made by one person, asmall group of leaders, or a group of central planners in anagency. These people choose what is to be produced and howresources are to be used at each stage in production. They alsodecide how goods and services will be distributed. If you livedin a command economy, you would be paid according to whatthe central planners decide, and you might even lose your abil-ity to make a career choice. Through a series of regulationsabout the kinds and amounts of available education, the gov-ernment guides people into certain jobs.

An advantage of a controlled economy is the speed withwhich resources can be rerouted. If war is likely, the centralplanning agency can halt all manufacturing of civilian goodsand channel the factors of production into making strictly mili-tary goods. Disadvantages include a lack of incentives to workhard or to show inventiveness, as well as a lack of consumerchoices. Because the government sets workers’ salaries, there is no reason to work efficiently or smartly.

Only a few countries in the worldtoday still have much of a commandeconomy. North Korea and the People’sRepublic of China are the two mainexamples because so much economicactivity there is government-planned.See Part B of Figure 2.4.

A Market EconomyIn a market economy,prices are an efficientmeans of providing infor-mation for voluntaryexchange. Why do yousuppose that prices areconsidered “neutral”?

Types of Economic Systems The types of eco-nomic systems differ from one another based on howthey answer the three basic questions of what, how, andfor whom to produce.

2.42.4

B Command EconomyCommand economies were com-mon throughout history. China’seconomy is still considered to begovernment-controlled, althoughthat is changing rapidly. Whomakes economic decisions in a command economy?

C Traditional EconomyNomadic herders in the Andes retain manyelements of a traditional economy, in whicheconomic decisions are based on customs.What examples in your life could be classified as belonging to a traditional economy?

36 CHAPTER 2

market economy: system inwhich individuals own the factorsof production and make economicdecisions through free interactionwhile looking out for their ownand their families’ best interests

market: freely chosen activitybetween buyers and sellers ofgoods and services

Market System The opposite of a pure command economy is apure market economy—also called capitalism. In a market system,economic decisions are not made by government, but by individualslooking out for their own and their families’ best interests. A limitedgovernment makes it possible for individuals to decide for them-selves the answers to the three basic questions. Individuals own thefactors of production, and therefore choose what to produce andhow to produce it. Individuals also choose what to buy with theincome received from selling their labor and other resources. All ofthese choices are guided not by tradition or a central planningagency, but by information in the form of market prices.

A market is not necessarily a place.Rather, it is the voluntary exchange ofgoods and services between buyers andsellers. This exchange may take place in a worldwide market for a good such ascrude oil. It may also take place in aneighborhood market for services suchas paper delivery, snow shoveling, andbaby-sitting.

As shown in Part A of Figure 2.4 onpage 35, prices in a market coordinate theinteraction between buyers and sellers. Asprices change, they act as signals to every-one within the system as to what should

be bought and what should be produced. A high price for a goodgenerally means that it is relatively scarce. A low price suggests that itis relatively abundant. The freedom of prices to rise and fall results ina neutral, self-organizing, incentive-driven system.

In the former Soviet Union, workers oftenused resources inefficiently or completely

wasted them when trying to fill governmentproduction quotas. For example, after thecentral planning committee ordered a quotafor glass based on the number of panes,

workers made many panes of glass—eachextremely thin and shattering easily! Whenthe production quota was changed to bebased on the weight of the panes, workersmade the glass panes so thick that theywere useless. ■

Economic Connection to... HistoryEconomic Connection to...

Student Web Activity Visit the Economics Today and Tomorrow Web site at tx.ett.glencoe.comand click on Chapter 2—Student WebActivities to learn more about the commandeconomy of the former Soviet Union.

The Soviet Union’s Quota SystemThe Soviet Union’s Quota System

http://www.glencoe.com/sec/socialstudies/economics/econtt2003/tx/chapter2/webact.shtml

circular flow of economicactivity: economic model thatpictures income as flowing contin-uously between businesses andconsumers

The flow of resources, goods and services, and money in a mar-ket system is actually circular, as shown in Figure 2.5. Economistsuse this model, called a circular flow of economic activity, toillustrate how the market system works. Note how dollars flow frombusinesses to individuals and back to businesses again. The factorsof production flow from individuals to businesses, which use themto produce goods and services that flow back to individuals. The cir-cular flow works because the information needed for its operation isscattered among all participants in the economy.

The advantages of a pure market system are many. People havefreedoms—to choose a career, to spend or not spend their incomehow they wish, to own private property, to take risks and earnprofits. In addition, the existence of competition provides con-sumers in a market economy with a wide array of goods andservices from which to choose, as well as an efficient system ofdetermining how much they cost. One disadvantage of a puremarket system involves concern about those too young, too old,

Circular Flow The inside arrows on the graph show individuals selling thefactors of production to businesses, who use them to produce goods and ser-vices. The outside of the graph shows the flow of money income from busi-nesses to individuals in the form of rents, wages, interest, and profits; and thereturn of money to businesses as consumer spending. What underlying factormakes this circular flow work?

IndividualsBusiness

Consumer Spending for Goods and Services

Production of Goods and Services

Sale or Rent of Resources(Land, Labor, Capital, Entrepreneurship)

Payments for Use of Resources(Wages, Interest, Rents, Profits)

FIGURE 2.5FIGURE 2.5


38 CHAPTER 2

or too sick to work. Many fear that survival for these people wouldbe difficult unless the government, churches, family members, orother organizations stepped in to provide goods and services.

Mixed System A mixed economy combines basic elements ofa pure market economy and a command economy. Most countriesof the world have a mixed economy in which private ownership ofproperty and individual decision making are combined with gov-ernment intervention and regulations. In the United States, mostdecisions are made by individuals reacting as participants withinthe market. However, federal, state, and local governments makelaws protecting private property and regulating certain areas ofbusiness. In Section 2, you’ll learn more about the United States’smixed economy, and the role of government in it.

To summarize, consider why a society has one type of economicsystem and not another. The goals that individuals set for their soci-ety help determine their economic system. The amount of govern-ment involvement in allocatingscarce resources also determines a society’s economic system.

Understanding Key Terms1. Define economic system, traditional economy,

command economy, market economy, market,circular flow of economic activity, mixedeconomy.

Reviewing Objectives2. What three questions must all economic sys-

tems answer?

3. Graphic Organizer In a chart like the onebelow, list the major types of economic systemsand their differences.

Applying Economic Concepts4. Economic Systems A society’s values deter-

mine how it allocates its resources. Identify anddescribe a societal value (for example, stability,certainty, quality, or personal freedom) that influ-ences a traditional economy and a commandeconomy. Then identify and describe a time inAmerican history when each system was used.

Critical Thinking Activity

Practice and assesskey skills with

Skillbuilder InteractiveWorkbook, Level 2.

1

5. Synthesizing Information Using Figure2.5 as a base, make a circular flow of eco-nomic activity reflecting your own life. Re-place the general information shown onFigure 2.5 with detailed specifics aboutyour income, items you purchase, and so on.For help in using graphs, see page xvi in theEconomic Handbook.

Who Answers Type of 3 Basic System Questions? Advantages Disadvantages

mixed economy: system com-bining characteristics of morethan one type of economy


When you make comparisons, you determine similarities and differences among ideas, objects, orevents. Making comparisons is an important skill because it helps you choose among alternatives.

Critical Thinking Skills

Making Comparisons

• Identify or decide whatwill be compared.

• Determine a commonarea or areas in whichcomparisons can bedrawn.

• Look for similarities anddifferences within theseareas.



Learning the Skill

To learn how to make comparisons, follow the stepslisted on the left.

Practicing the Skill

Read the passages below, then answer the questions.

“So long as mankind lived by raising crops andherding animals, there was not much need for meas-uring small units of time. The seasons were all impor-tant—to know when to expect the rain, the snow, thesun, the cold. Why bother with hours and minutes?Daylight was the only important time, the only timewhen men could work.”—From Daniel J. Boorstin’s The Discoverers: A History of Man’s Search

to Know His World and Himself, 1985

“Getting workers to work at the appointed clockhours was a recurring problem. In industrial cities, asteam whistle would blow at five in the morning towrest people from their sleep. If that proved insuffi-cient, employers would hire ‘knockers,’ men who wentfrom flat to flat ‘rapping on bedroom windows withlong poles.’ Sometimes the knockers even pulled onstrings ‘dangling from a window and attached to aworker’s toe.’”—From Jeremy Rifkin’s Time Wars: The Primary Conflict in Human

History, 1987

1. What is the topic of these passages?2. How are the passages similar? Different?

Application Activity

Survey your classmates about an issue in the news.Summarize the opinions and write a paragraph com-paring the different opinions.

40 CHAPTER 2

Terms to Know• capitalism• laissez-faire• free enterprise system• profit• profit incentive• private property• competition

Reading Objectives1. What is the role of govern-

ment in our free enterpriseeconomy?

2. How do freedom of enter-prise and freedom of choice apply to theAmerican economy?

3. What roles do private prop-erty, the profit incentive,and competition play in theAmerican economy?

READER’S GUIDE

Perhaps you wouldn’t buy a soft drink called “Wisdom,”but someone will. That’s one of the characteristics of amarket economy—freedom of choice. A seller can choose

to make or not make a product, and you can choose to buy it or not.

In this section you’ll learn that a pure market economic systemhas six major characteristics: (1) little or no government control,(2) freedom of enterprise, (3) freedom of choice, (4) private prop-erty, (5) the profit incentive, and (6) competition. These character-istics are interrelated, and all are present in the American economyto varying degrees.

BUSINESS WEEK, MARCH 22, 1999

Ready to take the next stepbeyond Coke and Pepsi, orangeand grape, tea and fruit drinks?Then how about some Wisdomor maybe a little Eros? Thosearen’t metaphysical thirstquenchers, but the real thing,examples of the latest trend insoft drinks: mystery concoctionsthat give little or no hint of whatflavor is in the bottle.

2

Limited Role of GovernmentIn his book An Inquiry into the Nature and

Causes of the Wealth of Nations, economist AdamSmith in 1776 described a system in which gov-ernment has little to do with a nation’s economicactivity. He said that individuals left on their ownwould work for their own self-interest. In doingso, they would be guided as if by an “invisiblehand” to use resources efficiently and thusachieve the maximum good for society.

Smith’s version of the ideal economic sys-tem is called capitalism, another name for themarket system. Pure capitalism has also beencalled a laissez-faire system. The French termmeans “let [people] do [as they choose].” Apure capitalist system is one in which the gov-ernment lets people and businesses maketheir own economic decisions without govern-ment constraints. Capitalism as practiced inthe United States today would be best definedas an economic system in which privateindividuals own the factors of production,but decide how to use them within legislatedlimits. See Figure 2.6.

Role of Government The government acts as a provider ofpublic services, such as maintaining our national parks. It also acts asprotector in the form of food and drug inspection. List three moreexamples of how the government is involved in our economy.

2.62.6

Job Description■ Ensures that

food, water,and air meetgovernmentstandards

■ Checks cleanli-ness and safetyof food andbeverages

Qualifications■ Bachelor’s

degree inenvironmentalhealth or bio-logical sciences

■ Licensed byexaminingboards

Average Yearly Salary: $58,000Job Outlook: Below average

CAREERSEnvironmentalHealth Inspector

—Occupational Outlook Handbook, 2000–01

capitalism: economic system inwhich private individuals own thefactors of production

laissez-faire: economic systemin which the government mini-mizes its interference with theeconomy

free enterprise system: eco-nomic system in which individualsown the factors of production anddecide how to use them withinlegal limits; same as capitalism

Smith’s ideas influenced the Founders of the United States,who limited the role of government mainly to national defenseand keeping the peace. Since the 1880s, however, the role of gov-ernment—federal, state, and local—has increased significantly.Among other things, federal agencies regulate the quality of vari-ous foods and drugs, watch over the nation’s money and bankingsystem, inspect workplaces for hazardous conditions, and guardagainst damage to the environment. The federal government alsouses tax revenues to provide social programs such as SocialSecurity and Medicare. State and local governments haveexpanded their roles in such areas as education, job training,recreation, and care for the elderly.

Freedom of EnterpriseAs well as capitalist, the American economy is also called a free

enterprise system. This term emphasizes that individuals are freeto own and control the factors of production. If you go into busi-ness for yourself, you may become rich selling your product.However, you may instead lose money, because you—or any entre-preneur—have no guarantee of success.

The government places certain legal restrictions on freedomof enterprise. For instance, just because you know how to fixcars does not mean that you can set up an automobile-repairbusiness in your backyard. Zoning regulations, child-labor laws,hazardous waste disposal rules, and other regulations limit freeenterprise to protect you and your neighbors.

Freedom of ChoiceFreedom of choice is the other side of freedom of enterprise.

It means that buyers, not sellers, make the decisions about whatshould be produced. The success or failure of a good or service inthe marketplace depends on individuals freely choosing what theywant to buy. If a music company releases a new CD, but few peoplebuy it, the music company most likely will not sign that particulargroup again. Buyers have signaled that they do not like that group.

Although buyers are free to make choices, the marketplace hasbecome increasingly complex. The government has intervened invarious areas of the economy to protect buyers. As shown inFigure 2.7, laws set safety standards for such things as toys, elec-tric appliances, and automobiles. In industries dominated by justa few companies—such as public utilities selling natural gas orelectricity—the government regulates the prices they may charge.

42 CHAPTER 2

profit: money left after all thecosts of production—wages,rents, interest, and taxes—havebeen paid

profit incentive: desire to makemoney that motivates people toproduce and sell goods andservices

private property: whatever isowned by individuals rather thanby government

Profit IncentiveWhen a person invests time, know-how, money, and other capi-

tal resources in a business, that investment is made with the ideaof making a profit. Profit is the money left after all the costs ofproduction have been paid, including wages, rents, interest, andtaxes. The desire to make a profit is called the profit incentive, orprofit motive. This desire motivates entrepreneurs to establishnew businesses and produce new kinds of goods and services.

The risk of failing is also part of the free enterprise system. Whathappens when profits are not realized—when businesses fail? Lossesare a signal to move resources elsewhere. Thus, the interaction ofboth profits and losses leads to an economy that is more efficient,adaptable to change, and continuously growing.

Private PropertyOne of the most important characteristics of capitalism is the

existence of private property, or property that is held by individu-als or groups rather than by the federal, state, or local govern-ments. You as an individual are free to buy whatever you canafford, whether it is land, a business, an automobile, or baseballcards. You can also control how, when, and by whom your prop-erty is used. What are called the rights of property, however, areactually the rights of humans to risk investment, own productiveassets, learn new ways of producing, and then to enjoythe benefits if these choices result in profits.

The Founders of the United States recognized thatsuch rights must not be violated, because these rights arethe invisible engine for creating wealth and prosperityfor all. The Constitution guarantees an owner’s right toprivate property and its use. Thus, in principle, no levelof government in the United States can seize or use pri-vate property, at least not without paying the owners.

Freedom of Choice Consumers in a market economy have theadvantage of being able to choose among products. Laws require pro-ducers to make sure that the products consumers choose are safe ones.How do consumers’ choices determine what will be produced?

2.72.7

44 CHAPTER 2

competition: rivalry among pro-ducers or sellers of similar goodsand services to win more business

CompetitionIn a free enterprise system, the lure of profits encourages

competition—the rivalry among producers of similar products towin more business by offering lower prices or better quality.Effective competition requires a large number of independent sell-ers, which means that no single company can noticeably affect theprice of a particular product or service. If one company raises itsprices, potential customers can simply go to other sellers.

Competition leads to an efficient use of resources. How so?Businesses have to keep prices low enough to attract buyers, yethigh enough to make a profit. This forces businesses to keeptheir costs of production as low as possible.

For competition to exist, barriers to enter and exit fromindustries must be weak. Businesses must be free to expand intoother industries. For the most part, the United States has weakbarriers to entry and exit. Yet some industries have tougher bar-riers to entry. For example, a per-son cannot become a physicianuntil he or she has received alicense from a state government.

Understanding Key Terms1. Define capitalism, laissez-faire, free enterprise

system, profit, profit incentive, private property,competition.

Reviewing Objectives2. What is the role of government in our free

enterprise economy?

3. How do freedom of enterprise and freedom ofchoice apply to the American economy?

4. Graphic Organizer Create a chart like theone in the next column to summarize the rolesthat profit incentive, private property, and com-petition play in the American economy.

Applying Economic Concepts5. Competition Describe a situation in which a

lack of competition caused you to pay more fora good or service.




2

6. Synthesizing Information Shoe Store Aoffers a pair of high-top sneakers for $48,whereas a competitor—Shoe Store B—offersthe same shoe at 25 percent off their regularprice of $62. From which store should youbuy the shoes? For help in understandingpercentages, see page xix in the EconomicHandbook.

Characteristic Definition Role in Capitalism

45

■ Born in Kirkaldy,County Fife,Scotland

■ Called the founder of moderneconomics

■ Teacher at theUniversity ofGlasgow

■ Lectured and wrote on moral philosophy

■ Wrote An Inquiryinto the Nature andCauses of theWealth of Nations(1776)

In An Inquiry into the Nature andCauses of the Wealth of Nations,

Adam Smith argues against gov-ernment interference in the mar-ketplace. He believed thatindividuals, seeking profit, endup benefiting society as a whole.

“[E]very individual, therefore,endeavours as much as he can [todirect his resources toward his ownbusiness] so that its produce maybe of the greatest value; every indi-vidual . . . neither intends to pro-mote the public interest, nor knowshow much he is promoting it. . . .He intends only his own gain, andhe is in this, as in many othercases, led by an invisible hand topromote an end which was no partof his intention. . . . By pursuinghis own interest he frequently pro-motes that of the society more effec-tually than when he really intendsto promote it.”

Smith criticized governmentofficials who had “the folly” toattempt to direct people in whatthey should produce. He believed

that no single person could directresources more efficiently thanindividuals watching out for theirown self-interest.

“It is the maxim of every pru-dent master of a family, never toattempt to make at home what itwill cost him more to make than tobuy. The ta[i]lor does not attempt tomake his own shoes, but buys themof the shoemaker. The shoemakerdoes not attempt to make his ownclothes, but employs a ta[i]lor. Thefarmer attempts to make neither theone nor the other, but employs thosedifferent [craftsmen]. All of themfind it [in their best interests] toemploy their whole industry in away in which they have someadvantage over their neighbours,and to purchase . . . whatever elsethey have occasion for.”Checking for Understanding

1. How does an “invisible hand” direct-ing an individual’s economic choicesbenefit society as a whole?

2. In Smith’s opinion, why should peo-ple not attempt to “employ theirresources” in many industries?

Adam SmithECONOMIST (1723–1790)

45

46 CHAPTER 2

Terms to Know• economic efficiency• economic equity• standard of living• economic growth

Reading Objectives1. What are the major goals of

a market economy?

2. How can people balanceeconomic rights with eco-nomic responsibilities?

READER’S GUIDE

Nations have values, and they set goals for themselves basedon those values. The United States is no exception. Itsgoals are evident in the supreme law of the land—the

Constitution—as well as in its government policies and in theactions of people like you. In this section you’ll learn how theAmerican economy strives to “promote the general Welfare.”

Goals of Free Enterprise The United States has a free enterprise, or capitalist, system.

Therefore, the major characteristics of a market economy shouldbe evident in its goals. Among the national goals of Americansare freedom, efficiency, equity, security, stability, and growth.Although these goals have ethical, social, and religious elements,let’s focus on their economic implications instead.

Economic Freedom The goal of economic freedom is to alloweach member of society to make choices. Americans have the high-est degree of freedom in the world to start their own businesses,to own private property, to make decisions in the marketplace,

PREAMBLE TO THE CONSTITUTION OF THE UNITED STATES

We, the people of the United States, in Order toform a more perfect Union, establish Justice, insuredomestic Tranquility, provide for the commondefense, promote the general Welfare, andsecure the Blessings of Liberty to ourselvesand our Posterity, do ordain and establishthis Constitution for the United States.

3

economic efficiency: wise useof available resources so thatcosts do not exceed benefits

economic equity: the attempt tobalance an economic policy sothat everyone benefits fairly

and to pursue other economic choices. People may choose towork nights or part-time, to have several jobs, and to move fromplace to place in search of work.

Along with this freedom come certain costs as shown in Figure2.8. In particular, individuals must normally accept the conse-quences of their decisions in our free enterprise system. If an entre-preneur starts a business that fails, for example, the governmentusually won’t help out.

Economic Efficiency Using our limited resources wisely isthe goal of economic efficiency. Because of scarcity, if the fac-tors of production are wasted, fewer goods and services overallwill be produced. We must always be watchful that the costs ofour economic actions do not exceed the benefits.

Economic Equity The issue of fairness underscoresthe goal of economic equity. Americans want their

economic system to be fair and just. That’s why weencourage our policy makers to pass laws such as

those dealing with equal pay forequal work, fairness in hiringpractices, and help for disabledworkers. See Figure 2.9.

Economic Freedom Alongwith the freedom to strive for profitcomes the freedom to fail. Whateconomic choices will you be freeto make upon graduating fromhigh school?

2.82.8


Economic Equity Laws requiring employers to hiredisabled persons and minorities aim to promote economicequity. What laws do you think should be passed tomake our economy more fair? Explain.

2.92.9

48 CHAPTER 2

standard of living: the materialwell-being of an individual, group,or nation measured by how welltheir necessities and luxuries aresatisfied

economic growth: expansion ofthe economy to produce moregoods, jobs, and wealth

Economic Security Americansunderstand that making profits oftenmeans taking risks. Yet we also wantprotection against risks beyond ourcontrol—accidents on the job, naturaldisasters, business and bank failures,poverty in old age. Our economic sys-tem provides such security through anumber of government social programs.

Economic Stability The goal of eco-nomic stability seeks to reduce extremeups and downs in the standard ofliving—the material well-being of an indi-vidual, group, or nation. The standard ofliving is measured by the average valueof goods and services used by the aver-age citizen during a given period of time.The United States has more individualsenjoying a high standard of living thanalmost anywhere in the world.

Economic Growth Economic growth means producingincreasing amounts of goods and services over the long term. Asthe population increases, the economy must also expand in orderto provide for additional needs and wants. All nations have eco-nomic growth as a goal because it helps meet other goals.

Trade-Offs Among Goals In a world of scarcity, achievingnational goals requires trade-offs. For example, any program thatprovides economic security—Medicare, Social Security, or unem-ployment compensation—uses resources that could have beendirected elsewhere.

A plan of action must be developed in order to accomplish thenation’s goals. Such a plan often involves economic policy-makingby elected or appointed officials who must face the reality ofscarcity. Understanding this will help you realize that not allpolitical desires can be turned into economic reality.

Rights and ResponsibilitiesThe American free enterprise system bestows numerous eco-

nomic rights and protections on individuals like you. You have

Markets exist for just about everything—computers,natural gas, shoes, labor services, and so on. Manymarkets used to be confined to specific geographicalareas. Today the Internet has created a virtual world-wide marketplace for many goods and services. Justconsider recorded music. Since the introduction of asecure music standard, those connected to the Internetanywhere in the world can buy and download songs.Information about jobs available anywhere on theearth is also easily found via the Internet. You mayanswer a job announcement, interview, and be hiredwithout ever leaving your desk! ■

The Cybermarket


the right to enter into just about any profession or business youwant. You have the right to work very little or to become a“workaholic.” You have the right to buy those products andbrands that you like and to reject all others.

A well-functioning free enterprise system will not continue, how-ever, if individuals do not take on certain economic responsibilities.The first, of course, is to be able to support yourself and your family.As shown in Figure 2.10, you have a responsibility to use youreducation in a reasonable manner that helps you become a produc-tive member of the free enterprise system.

Finally, because government has become such an important partof our economy, individuals in our system have the responsibilityof electing responsible government officials. This responsibilityrequires both the knowledge of possible government policies andthe ability to analyze the consequences of those policies.

Understanding Key Terms1. Define economic efficiency, economic equity,

standard of living, economic growth.

Reviewing Objectives2. Graphic Organizer Create a diagram like the

one below to list and describe the major goalsof a market economy.

3. How can people balance economic rights witheconomic responsibilities?

Applying Economic Concepts4. Economic Goals How can the goal of eco-

nomic equity conflict with the goal of economicfreedom? Provide an example for yourexplanation.

5. Summarizing Information Summarizethe goals of the American economy in aphoto essay or through song lyrics. Shareyour presentation with the rest of the class.Ask class members to identify the goals evi-dent in your presentation.




3

Economic Responsibility “There is no such thing as a free lunch.” This quote, often usedin economics, means that nothing is free—including your education. Tax dollars pay for you to learnhow to become a productive citizen. What other economic responsibilities do you have?

2.102.10

Goals of U.S.Economy

SPOTLIGHT ON THE ECONOMY

50 CHAPTER 2

In 1782, when the bald eagle became theAmerican symbol, it ruled the skies—25,000 to

75,000 patrolled what would become the lower48 states. By the early 1960s, however, fewer than450 nesting pairs remained. Defenseless againsthuman predators, the bald eagle was approach-ing extinction.

. . . [O]n December 28, 1973, PresidentRichard M. Nixon took decisive actionto prevent that. He signed theEndangered Species Act. Despite theoverwhelming support for the newlaw, it quickly became the most reviled

piece of environmental legislationever enacted.

With his signature, Nixonhad protected not only the baldeagle but also scores of otherweird animals and plants. . . .

Environmentalists seized onthe Act as a powerful weapon to protect sensitivehabitats; meanwhile developers, loggers, and cat-tle ranchers, to name a few, howled in pain. . . .[C]ontroversy over protecting the spotted owl

threatened to close downlogging on millions ofacres of forest in the PacificNorthwest. . . .

Conservative critics have denounced the Act,arguing that it gives Fish & Wildlife Servicebiologists unlimited power to block develop-ment—without paying for it. They say that if thegovernment cuts land values by blocking devel-opment, it should compensate the owners.

. . . Flexible interpretation of the Act nowallows landowners and developers to destroysome endangered-species habitat if they agreeto preserve or restore habitat for the speciessomewhere else. Adding more incentives, suchas tax breaks, could also ease critics’ concerns.

For all its shortcomings, the Act has slowedthe decline of imperiled species. A few havebeen saved, including the bald eagle. . . .—Reprinted from January 18, 1999 issue of Business Week by special

permission, copyright © 1999 by The McGraw-Hill Companies, Inc.

Think About It1. What argument do environmentalists make in sup-

port of the Endangered Species Act?

2. What argument do critics make against the Act?

3. What two economic goals are in conflict in thissituation?

Check It Out! In this chapter you learned about six eco-nomic goals our nation strives to meet. The followingarticle points out how the actions of people and the gov-ernment may cause some economic goals to conflict.

Spotted owl

Bald eagle

Save the Species—butAdd Incentives

Save the Species—butAdd Incentives


Economic Systems

• Every type of economic system must answer threebasic questions: What goods and services shouldbe produced? How should they be produced? Whoshould share in what is produced?

• There are four types of economic systems: tradi-tional, command, market, and mixed.

• In a traditional economy, economic decisions arebased on customs and beliefs handed down fromgeneration to generation.

• In a command economy, government leaders con-trol the factors of production and, therefore, makeall decisions about their use.

• In a market economy, individuals looking out fortheir own and their families’ best interests make theeconomic decisions.

• Most countries of the world have a mixed economyin which private ownership of property and individ-ual decision making are combined with governmentregulations.

Characteristics of theAmerican Economy

• A pure market economic system has six majorcharacteristics: little or no government control,freedom of enterprise, freedom of choice, privateproperty, the profit incentive, and competition.

• Capitalism, as practiced in the United States, hasprivate individuals owning the factors of productionbut using them within the limits of the law.

• The profit incentive is the desire that motivatesentrepreneurs to establish new businesses, expandexisting ones, and change the kinds of goods andservices produced.

• One of the most important characteristics of capi-talism is the existence of private property.

• Competition leads to an efficient use of resources,better goods and services, and low prices forconsumers.

The Goals of the Nation

• The United States has a free enterprise, or capital-ist, economic system.

• Among the economic goals of Americans are eco-nomic freedom, economic efficiency, economicequity, economic security, economic stability, andeconomic growth.

• A well-functioning free enterprise system requiresindividuals to take on certain economic responsibil-ities, including becoming productive members ofsociety and electing responsible governmentofficials.

C H A P T E R

SECTION 1

SECTION 2

SECTION 3

Chapter Overview Visit the Economics Today and Tomorrow Web site at tx.ett.glencoe.comand click on Chapter 2—Chapter Overviews toreview chapter information.

2

http://www.glencoe.com/sec/socialstudies/economics/econtt2003/tx/chapter2/overview.shtml

Identifying Key TermsUse terms from the following list to complete thesentences below.

■ traditional ■ private propertyeconomy ■ profit

■ command ■ invisible handeconomy ■ competition

■ mixed economy ■ economic growth■ entrepreneur ■ economic equity■ capitalism ■ standard of living■ free enterprise

system

1. Other terms for the market economic sys-tem are _____ and _____ .

2. Many Americans believe that their eco-nomic system accounts for the high _____in the United States.

3. The concept of _____ allows people to buyand own land, a home, or their ownbusiness.

4. The _____ can make profits or incur greatlosses.

5. A person may keep the _____ they earnfrom selling.

6. Most people live in countries that have a_____ .

7. Adam Smith said the economy isdirected by an _____ .

8. Our government promotes _____ , or fairand just economic policies.

9. The existence of _____ keeps prices lowfor consumers.

Recalling Facts and IdeasSection 1

1. What basic economic question helpsdetermine the career path of individuals?

2. What economic question is beinganswered if an industry replaces someworkers with machines?

3. How does a traditional economy answerthe basic question, “How should it beproduced?”

4. Who answers the three basic economicquestions in a command system?

5. Who owns the factors of production in amarket economy?

Section 26. What are six important characteristics of

free enterprise?7. What is government’s limited role in

pure capitalism?8. Why is private property important in the

American economic system?

Section 39. What are three goals of the free enter-

prise system?10. What does the United States do to pro-

mote economic security for individuals?

2

Self-Check Quiz Visit the Economics Today and Tomorrow Web site at tx.ett.glencoe.comand click on Chapter 2—Self-Check Quizzes toprepare for the Chapter Test.

52 CHAPTER 2

http://www.glencoe.com/qe/qe59.php?qi=1544&ch=2


Thinking Critically1. Making Comparisons Create a diagram like

the one below to list the advantages anddisadvantages of competition to buyersand sellers.

2. Categorizing Information Explain what U.S.economic goal is being met by the followingactions: (a) The government regulates theamount that an electric company can chargeyou for energy. (b) Juan moves to Seattle towork for a Web page designer. (c) Your sav-ings account is insured up to $100,000.

ApplyingEconomic ConceptsEconomic Systems An economic system withinyour school determines the answer to the basicquestion, “For whom should it be produced?”Make a list of the goods and services availableto students within the school. After each item,write whether the distribution of this good orservice is determined according to the princi-ples of a market, command, or traditionaleconomy.

Reviewing SkillsMaking Comparisons Research Russia’s econ-omy today and when it was a command econ-omy under the Soviet Union. Prepare a chartlisting the similarities and differences in howthe three basic economic questions were andare answered under both economies.

CooperativeLearning Project

In small groups, submit plans for a nationaleducation system in a command economy.Provide answers to such questions as: Whatlevel of education should be available with-out cost to everyone? Should academicachievement or testing qualify students forhigher levels of education?

TechnologyActivityUsing a Spreadsheet Create a spreadsheet likethe one below highlighting your weeklyspending habits.

1. In cell F2, use a formula such as�SUM(B2:E2) to calculate total expendi-tures on Monday. Click and drag this for-mula to cells F3 through F8 to find theother weekday sums.

2. Using the above summation method, com-pute total expenditures for cells B9–F9.

3. Print your results.

Review world economic news from maga-zines or Web sites. List the economic deci-sions of several nations and make a table thatclassifies the decisions as supporting freemarket or command systems.

Competition

Buyers

Sellers

Buyers

Sellers

Advantages

Disadvantages

Economics LabEconomics Lab

Testing Consumer ProductsFrom the classroom of Mitzie B. Tabor, West Carter High School, Olive Hill, Kentucky

In Chapter 2 you learned that the freeenterprise system allows individuals to

take risks and go into business for them-selves. In this lab, you’ll become a businessowner and select a product to make. Aftershopping for the resources needed to makethat product, you’ll perform tests on theitems to see if they are quality, yet cost-effective, goods.

✔ copies of Consumer Reports magazine

✔ supplies pertaining to your product (seeprocedure #3 in the next column)

✔ pencil

✔ writing paper

✔ graph paper and poster board

1. Organize into groups of three.

2. Decide upon a small business operationto run. Choose one of the product ideasthat follow, or develop your own product.

■ Sell “cookie-wiches” consisting oficing between two sugar cookies.

■ Sell hot chocolate withmarshmallows.

■ Sell portraits sketched with markerson drawing paper.

■ Sell orange juice-banana fruit“smoothies.”

3. Gather three samples of the items(resources) you’ll need to make your prod-ucts. For example:

■ To make the sandwich cookies, youneed three different types of sugarcookies and icing.

■ For the hot chocolate, you needthree different samples of cocoa andmarshmallows.

■ For the portraits, gather three differ-ent types of markers and drawingpaper.

■ To make the smoothies, gather threedifferent brand names of orangejuice and bananas.

54

55

4. Now you’ll devise a product-comparisontest to use on the three versions of eachitem. Scan copies of Consumer Reportstests to get an idea of what categories touse in your tests—cost per unit, durabil-ity, flavor, aftertaste, ease of use, reliabil-ity, overall score, and so on.

5. Within your group, perform the product-comparison tests. You may want toinclude the rest of the class in a blindtest to get a larger response.

Use the results of your tests to draw agraph (bar, circle, or line) visually showingwhich item came out ahead of the others.Draw your graph(s) on poster board to usein a presentation to the rest of the class.

Study the graph that you created in stepC, then answer the questions below.1. How wide was the price differenceamong competing brands of resources?2. What other factors influenced yourchoice of items to use in your product?3. Were you surprised by the results ofyour tests? Explain.

chapter 2: economic systems and the american … systems and the american economy. ... • command...

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