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Chapter 2

Chapter 2. Economic Systems and the American Economy. Section 2-1: Economic Systems. Economic System : way in which a nation uses its resources to satisfy its people’s wants and needs Three Basic Questions all nations have to answer (businesses too) What goods and services should be produced?

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Chapter 2

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  1. Chapter 2 Economic Systems and the American Economy

  2. Section 2-1: Economic Systems • Economic System:way in which a nation uses its resources to satisfy its people’s wants and needs • Three Basic Questions all nations have to answer (businesses too) • What goods and services should be produced? • How should they be produced? • Who will get the goods and how will they be distributed?

  3. Types of Economic Systems • Traditional economy: based on habit, customs and religious tradition -passed down for generations • Children take on the profession of their parents • Command economy (also called directed): government leaders answer the three basic questions • Individuals have little economic freedom • Few consumer goods are available

  4. Market/Capital economy: individuals make the decisions • Market: voluntary exchange of goods and services between buyers and sellers

  5. Income Payments $ (Wages, Rent, Interest, Profit) $ (1) Circular flow of economic activity: income flows continuously between business and consumers Productive Resources (Labor, Land, Capital, Management) (2) Consumers Businesses Goods and Services (3) $ Consumer Expenditures $ (4)

  6. Mixed economy: combination of three pure economic systems-all economies are really mixed

  7. Section 2-2: Characteristics of the American Economy • Limited Role of Government • Capitalism: economic system in which private individuals own the factors of production • Pure capitalism can be referred to as a laissez-faire system • Laissez-faire: a system where government limits its interference with the economy (means to let alone)

  8. Freedom of Enterprise • Individuals can own and control the factors of production • No guarantee of success • Governments place restrictions on some things ( child labor laws, special licensing, zoning laws, etc.)

  9. Freedom of Choice • Consumers decide what is produced by buying it or not buying it (you vote for products you like) • Demand determines what is produced -If a product doesn’t sell, the company looses money • Government sets safety standards • Government regulates price in some industries (ex. utility companies)

  10. Profit Incentive • People produce goods to make a profit- money left after costs of production are paid (ex. Wages, rent, taxes, etc) • Losses are a sign of inefficient use of resources-forces businesses to change in order to make a profit • Private Property • Private property is property held by individuals or groups • Individuals control how property is used- want to make a the best profit

  11. Competition • Competing businesses try to win customers with lower prices or betterquality goods and services • Businesses need to use resources efficiently to stay competitive (prices have to be low enough to attract buyers yet high enough to make a profit) • In the U.S., most industries have weak barriers to enter but some (ex. Becoming a doctor) are more difficult

  12. Section 2-3: Goals of the Nation • Goals of Free Enterprise • 1) Economic Freedom: allowing people to make their own decisions on what to purchase • 2) Economic Efficiency: making the best use of your limited resources (land, labor, capital, Entrepreneurship) • 3) Economic Equity: Laws regarding the economy should be fair-everyone has the right to earn an income or to invest • 4) Security: Government sets up social program to help people attain basic needs in case of hardship CONT..

  13. 5) Economic Stability: few ups and downs in the economy • Tries to stop: • Inflation: rise in the average cost of goods and services without an increase in wages- dollar loses value • Especially hard on people with fixed incomes, retired, lenders of money • Deflation: average prices fall- causes unemployment- waste of economic resources • 6) Economic growth: growth of the economy as technology and education increase- we are able to acquire more goods and services than previous generations

  14. Rights and responsibilities • People have the right to do what they want within the law (enter any profession you like, work a little or a lot, buy what you want) • People have to behave responsibly in order for the system to work (support yourself and your family) • People are responsible for electing good government officials

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