The American Economic System

Basic Economic Unit Part II

Types of Economic Systems

Traditional

Characteristics: Little Change Based on Custom

How answer the economic questions? How they always

have

Command

Characteristics Government

controls means of production

Little individual influence

Communism & Socialism

How answer the economic questions? Government does

Socialism

Gov. owns some factors of production and distributes products and wages

Communism

Socialism under the dictatorship of the communist party

Market

Characteristics: Private

individuals control the factors of production

Individual freedom

How questions answered? By businesses

and consumers

Mixed

Characteristics: Some individual freedom some

government control

How are questions answered? Individuals do but have some

government intervention

All economies are actually mixed. What determines whether an economy is considered market or command depends on the level of

Government involvement.

Who developed the principles of a market economy?

Adam Smith

What was the Wealth of Nations?

Smith’s book that explained the principles of Capitalism

What did Smith mean by Laissez-faire economics?

“To let alone” Government

should stay out of marketplace except to ensure competition

The Invisible Hand

Belief that individuals on their own would work for own self-interest

Would be guided by “invisible hand” to use resources efficiently

Characteristics of Market/Free Enterprise System

Little or no government intervention – governments role in econ. is to ensure competition

Free Enterprise – Competition with little gov. interference

Freedom of Choice – individuals can choose what work to do and what we buy

Characteristics Continued

Private Property – right to own and use our property as we choose within certain legal limits

Profit Incentive – the driving force of capitalism, the ability to accumulate wealth

Competition – the struggle between buyers and sellers to get the best products at lowest prices

What does the Circular Flow Model illustrate?

How resources, goods and services, and money flow in a circular pattern

Market

The exchange of goods and services between buyers and sellers

Factor Market

Where productive resources (the factors of production) are bought and sold

Product Market

Market where goods and services (finished products) are offered for sale

What happens when less is exchanged in the circular flow?

The economy shrinks, productivity goes down

What happens when more is exchanged?

Economy grows, productivity increases

What is productivity?

The amount of output that can be produced by a set amount of resources in a given period of time

Productivity

Goes up when can produce the same amount of output in less time

Or

When can produce more output with same amount of resources in same time

Increasing Productivity

Specialization when people, businesses or countries focus on what they do best

Division of Labor breaking down of a job into small parts performed by different workers

Investing in Human Capital spending to improve worker skills

What do these practices create between individuals, communities and nations?

Economic Interdependence creates dependence between people for goods and services