Chapter 2 Economic Systems

BIG IDEAS = Responsibility, Choices, Changes, and Relationships

Essential Questions:

– How do societies provide for their people in a traditional, command and market

economy?

– How do the major characteristics of free enterprise capitalism work in the US?

– What goals affect the roles of government, consumers, and entrepreneurs in

the US economy?

* Remember you are responsible for answering one of these essential questions at the end of this chapter as an assessment.

Why it matters

Understand: Economic systems govern WHAT goods and services to produce,

HOW to produce them and for WHOM to produce them. The US basic economic

decisions are made through the free interactions of individuals looking out for their

best interests.

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LEARNING GOALS:

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

services.

2. Explain the advantages and disadvantages of all economic systems.

(T,C,M and C,S,M)

3. Describe the characteristics of free enterprise.

4. Describe the roles of government, consumers and entrepreneurs play in

free enterprise capitalism.

What you need to Do and Be Skilled at:

• Read, comprehend, and summarize key information from text

collaboratively for a study guide.

• Identifying and providing examples of various economies with real world

applications. (T,C,M and C,S,M)

• Illustrating and explaining economic systems and key concepts within

events and a block buster movie.

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Enter Lesson #1 Vocabulary KNOW

9 Vocab words

• economic system

• traditional economy

• command economy

• market economy

• market

• capitalism

• mixed economy

• socialism

• communism

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Economic Systems

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

– Traditional

– Command

– Market

• Most economies today combine the elements of all three.

• Three major economic systems exist:

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Traditional EconomiesTraditional economies 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

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Command Economies 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.

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Market Economies

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, which means that the factors of production are privately owned.

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• 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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Mixed Economies

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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• 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 of a mixed economy

– More services mean higher costs for citizens overall.

– In socialist countries, availability of services may be limited or quality deteriorates over time.

EXIT LESSON #1

Mixed Economies (cont.)

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Enter Lesson #2 Vocabulary KNOW

8 Vocab words

• free enterprise

• voluntary exchange

• private property rights

• profit

• profit motive

• competition

• consumer sovereignty

• mixed or modified free enterprise economy

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American Free Enterprise Characteristics of the US Economy

• 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.

• 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.

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Characteristics of Free Enterprise CapitalismThe US economy incorporates 5 major characteristics of a free enterprise economy.

• Competition

• Economic freedom

• 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.

• Voluntary exchange

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The Role of the Entrepreneur 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

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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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The Role of the Government 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.

EXIT LESSON #2

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Economic and Social Goals of the US Economy

The 3 different roles share different goals in the US economy.

• Economic efficiency

• Economic equity

• Economic security

• Full employment

• Price Stability

• Economic growth

• Economic freedom

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

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EXIT LESSON #3