THE ECONOMIC SYSTEMChap. 17

THE NEED FOR ECONOMIC SYSTEMS

All people have essential needs for survival (food, water, shelter)

After needs are met they have wants; things not essential for survival (phone, tv, etc)

QUESTION 1

Name one essential need.

QUESTION 2

How is a want different than a need?

TYPES OF ECONOMIC SYSTEMS

There are three basic systemsTraditional economy: economic decisions are based on how economic activity has been done in the past (barter system, making own goods) Common in developing nations

2ND TYPE-COMMAND ECONOMY

Government makes all economic decisions, and owns all capital, tools and production equipment (communist or Marxist countries)

3RD TYPE-MARKET ECONOMYEconomic decisions are made by individuals acting on their own interests (United States)Also known as (aka)Free Market or Capitalism: based on freedom to buy and sell goods as you want

3. What economic system has the most government involvement?

A. Communism B. Capitalism C. Free Market D. Market

4. How is a market economy different from a command economy?

A. More consumer choices B. More government interference C. Private property D. A & B E. A & C

LIFE IN A MARKET ECONOMY: COMPETITION FOR RESOURCES

People are free to start a business and pursue profit (money a business has left after it has paid its expenses)

Scarcity (lack of a particular resource) creates competitionScarcity also

affects prices

Resources are needed to provide service and make profit

SUPPLY AND DEMAND

Changes in price are the result of the laws of supply and demand Law of supply: business will produce more

products when they can sell them at higher prices and fewer products when prices are low

Law of demand: buyers will demand a greater quantity of a good when its price is low and want less when the price is high

QUESTION 5

Why do people establish a business in a market or capitalist economy?

A. to make a profit B. to help people C. to provide a service to make the world a

better place D. so the government can make more money

QUESTION 6

How are prices determined? A. Businesses pick a number B. Demand by consumers C. Supply by producers D. Supply and Demand

FREE ENTERPRISE, MARKET OR CAPITALISM

Is when business owners may operate however they wish in a market economy, with little interference from government Opportunities for huge profit (Bill Gates)…as well

has huge losses Competition is vital and pushes for improvement

of products

CAPITALISM

An economic system in which productive resources are owned by private citizens (US)

Linked to free economy; people buy and sell as they please

Encourages investment, innovation, and production of quality goods

QUESTION 7

Under what system do people own private property, discourage government interference and try to make a profit.

A. capitalism B. communism C. free market D. both A & C E. both B & C

MONOPOLIES

The free-enterprise system does not like businesses that limit competition which can happen if a business has a monopoly.

A company has a monopoly if it is the only one selling a particular product or service. They can set prices regardless of supply and demand because they are the only ones that have the supply. Monopolies are illegal.

QUESTION 8

What happens if demand for a product exceeds supply?

A. Prices for that product will go up B. Prices for that product will go down C. Prices stay the same D. The government takes over the business

in a capitalist nation.

THE U.S. ECONOMIC SYSTEM

The US has a free Market economy or modified capitalism but there are some instances in which government imposes some regulations (like a command economy)

Question 9 Give an example of the US regulating a

business.

SOME NATIONS HAVE A MIXED ECONOMY AKA SOCIALISM

An economy that mixes elements of different economic systems

Business are free to operate as they wish, but must follow certain regulations that are monitored by the government; include price control and subsidies Intended to protect people and environment Ex. Minimum wage or how much of a chemical

can be released into the air

QUESTION 10

What do we call an economy that is a combination of both capitalism and other systems?

A. Mixed Up B. Mixed or Socialism C. Communism D. Marxism

QUESTION 11

Why do businesses exist in a capitalist, free enterprise, market economy?

A. To provide services to people B. To provide goods to people C. To give people jobs D. To make a profit for themselves and

stockholders

QUESTION 12

There are only two companies that produce “Amazing-Gadget-That-Everyone-Wants”. If operating under the US government, would these two companies be allowed to join up and be the sole producer of this product? Yes or no and why?

BUSINESS ORGANIZATIONS

Businesses may be owned in three different way in US Sole proprietorship Partnership Corporation

Each one is slightly different from each other.

SOLE PROPRIETORSHIPS

A small business owned by one person Advantages: being your own boss, being able

to decide business hours, and taking all profits

Disadvantages: must have or borrow all money for rend and equipment, must be able to pay employees, personally liable for taxes

PARTNERSHIP

A business in which two or more people share the responsibilities, costs, profits, and losses

Allows for more capital (money to invest) and better chances of success

Advantages and disadvantages similar to sole proprietorship except that there are multiple people to provide capital and share responsibilities. Owners must cooperate or lose efficiency

CORPORATIONS

A type of business that is recognized as a separate legal entity from the people who own it (includes large business)

Permanent organization(doesn’t end when owner dies)

QUESTION 13

How did most American businesses start out?A. As sole proprietorshipsB. As partnershipsC. As corporationsD. The government created them

HOW CORPORATIONS FUNCTION:RAISING MONEY

Selling stock (shares of ownership) to gain capital Shareholders are people who buy corporate

stocks Dividends are corporate profits paid to

stockholders Selling bonds (loans)

People buy bonds are loaning money to the company, which will then have to pay interest before it pays the stockholders

QUESTION 14

Why would someone buy a bond or stock of a company instead of putting money in a savings account? (hint: what is riskier, what could you more money?)

HOW CORPORATIONS FUNCTION: ELECTED DIRECTORS

Stockholders elect directors of corporation Law requires that at least one stockholder

meeting be held each year Board of directors chosen at this time Votes on changes in the business structure

One share = one vote

HOW A CORPORATION FUNCTIONS:DEBT RESPONSIBILITY

Neither stockholders or executives are responsible for failure

If a corporation goes out of business, its assets (property, building, valuables) are sold Money raised goes towards paying the debt

QUESTION 15, 16 AND 17

So let’s say Blockbuster goes out of business and declares bankruptcy (a distinct possibility)-what happens to the stores, employees and stockholders?

NONPROFIT ORGANIZATIONS

Organizations that provide goods and services without seeking to earn a profit for stockholders Charities, research associations, educational

programs Don’t make profit, so don’t pay taxes Large nonprofits are corporations

Red Cross, United Way, Girl Scouts

QUESTION 18, 19 AND 20.

18.Why don’t nonprofit organizations pay taxes?

19.If you wanted to own a business but not be the only person sharing responsibility, what type of business organization should you create?

20.Explain the difference between bond and a stock.

FACTORS OF PRODUCTION

Countries and companies must decide (1) what they are going to produce, (2) how they are going to produce it and (3) who is going to buy it. To answer these three questions the four factors

of production must be taken into consideration-natural resources, capital, labor and entrepreneurship.

NATURAL RESOURCES

Raw materials needed to produce goods found on or in the Earth or atmosphere

Limited and only considered a factor when you have to pay for it

CAPITAL

The manufactured goods used to make other goods and services Tools, trucks, machines, computers

LABOR

All human effort, skills, and abilities used to produce goods and services

Refers to the actually workers rather than the business owners Paid hourly or with fixed earnings (salary)

ENTREPRENEURSHIP

A person who organizes, manages and assumes the risks of a business

Come up with new product, put in their own time and capital and hopes to make a substantial profit

QUESTION 21 AND 22

21. Name a famous entrepreneur

22. What do you think is the most important factor of production and why?

THE GOVERNMENT’S ROLE IN A FREE MARKET

US government does not dictate what type of products are made but they do control: Monopolies Protects personal rights Taxes

QUESTION 23

Why do some businesses pay their workers by the hour as opposed to salaries?

QUESTION 24.

Do you think the idea of a minimum wage is a good idea or should employers be able to pay whatever wage they can to fill their needs? Explain

QUESTION 25.

The state of Pennsylvania has had a lot of new companies come to our state to extract natural gas in a process known as hydraulic fracturing or “fracking”. Of the four factors of production which one best explains why these companies are locating here.

Bonus: What does “aka” stand for?