Download The American Economic System

The American
Economic System
GOAL 7 NOTES
What is Economics?
 Economics is the study of how individuals
and countries decide how to use scarce
resources to produce needed goods and
services.
3 Basic Economic
Questions
 We do this by answering 3 basic
economic questions:
 (1) what and how much should be
produced?
 (2) How should the goods and services
be produced?
 (3) How the goods will be distributed?
Why Study Economics?
 The main reason is scarcity. Scarcity is,
having unlimited wants but having limited
resources. Scarcity is the #1 economic
problem
Economizing
 We are forced to make economic
choices. This is called economizing, or
making the best economic decision on
how to use scarce resources. By
studying economics we can make bettereducated economic choices
Trade-offs

In making economic choices, we must
make trade-offs. A trade-off is choosing
what we want. By making a trade-off we
must also give something up. (Ex.
Working over studying.)
Opportunity Costs
 Opportunity Costs are what you give up
when you make an economic decision.
(Ex. failing a test.)
Economics in our society
We have a high standard of living in
this country, here are some reasons:
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Resources, we have an abundant supply and
variety.
Technology, advanced machines and
computers.
Mass Production, producing goods in large
quantities. Two techniques that were
developed that aided in mass production were,
interchangeable parts, developed by Eli
Whitney, and the assembly line, developed by
Henry Ford.
Automation, using machines to produce
products.
Factors of Production
 Factors of production are the essential
components that producers use when
manufacturing goods in the US.
 There are 4 factors of production.
The 4 Factors Are……
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Land- all of the resources and materials used
in making a product
Labor- all of the human physical activity used
in making a product
Capital- the machines, tools, and buildings
used in making a product
Entrepreneurship- the risk taker, ideas,
decision maker, and organizer of a business.
They decide how to use the Factors of
Production, so that they can be used
efficiently.
Types of business
organization in the United
States
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Sole Proprietorship- The largest type of business
organization in the US. About 19 million of these in
the US. These are businesses that are owned and
operated by one person or a married couple. Sole
Proprietorships are usually locally owned and
operated.
Advantages—You are the boss, you decide what to
make, you set the prices, you set the hours of
operation, and you receive all of the profits
Disadvantages—You assume all of the risks, you
invest all of the money to start the business, you pay
all of the bills, you must stand behind your product,
and you lose all of your money if the business fails.
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Partnership- A business that 2 or more people
own. Usually larger than a sole proprietorship,
but still pretty small. People usually start
partnerships to pool their money together to
start the business, to combine different talents,
and to share the workload.
Advantages—They share in the financial risk,
and if the business fails both are liable.
Disadvantages—There could be
disagreements between the partners, and if one
partner dies, a new partnership must be formed
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Corporations- are businesses that have many
owners. These are large businesses that sell
stock in their corporation to raise money for
investment. The investors are gambling that the
corporation will turn a profit. There are two
types of stock--- common stock, in which the
investor receives a dividend if the company
makes a profit for that year, and preferred
stock, the investor receives a fixed dividend
each year. Preferred stockholders can vote
on who runs the corporation (ceo). 90% of all
products produced in the US are produced by
corporations.
Corporations Continued….
 Advantages—There are many people who
share the risk, stockholders have limited
liability, and there is more money to invest and
expand the company.
 Disadvantages—The company may become
too large and over expand, there are also
power struggles and hostile takeovers that
could hurt the company.
Types of economic systems
 An economic system is the way a country
tries to answer the 3 basic economic
questions.
 The what, the how , and the who.
 There are 4 main types of economic
systems in the world today.
Traditional Economic
System
 This system is used by more primitive,
less complex societies. This system uses
customs and traditions to answer the
basic economic questions. Some
examples are Inuits and tribal cultures.
These are labor intensive, and most of
the work is done by hand.
Command Economic
System
 The government controls all economic
activity and answers the economic
questions. Individuals have almost no
free will or choice in what is produced.
This is known as communism, and it is
used in China, Cuba, and in North Korea
Free Market Economic
System

(capitalism), the consumers and
producers answer all of the economic
questions by interaction in a free
market; the government has a limited
role, mostly in the form of consumer
protection. This is also known as free
enterprise, and is used in the United
States.
Mixed Economic System
 The economic questions are answered
by the government and by the people.
There is some government ownership of
business, this is called nationalization.
This system is also known as socialism,
and is currently used by France, Great
Britain, and Canada
Examination of the factors of
production
 Land- Also known as natural resources
or raw materials that products are made
from. If a country is going to be
successful, they must have a high quality
and quantity of natural resources. This is
one of the primary reasons that the US
has a successful economy
Conservation
 is the saving and wise use of natural
resources. This is critical because we
have a limited supply of resources
Renewable v. Nonrenewable
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. Some resources are non-renewable; they
can only be used once. Some examples are
gas and coal which are fossil fuels.
Other resources are renewable, which
means they can be used over again, or
recycled. Some examples are paper, glass,
and aluminum. Recycling has become a
major element in the conservation process.
Labor
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is the human physical and mental activity that
goes into making a product. Because of selfinterest, or profit, most Americans have a
strong incentive to work hard and improve
their skills as a worker. Today’s industry
requires more skilled workers than unskilled
ones. Education is a key, and there is an
emphasis placed on job training.
Four reasons why the US
is so productive
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Better training and higher levels of
education
Higher wages and more job benefits
Workers compensation and laws to
protect workers
More incentive to make money, or self
interest
Advantages of being a
skilled worker
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Less physical labor
Higher pay
More benefits—paid vacations, sick
leave, and a retirement program
Prestige—more status in society
Capital
 All of the tools, machines, and buildings
used in making a product. This factor of
production relies on land and labor to be
effective. Businesses always search to
improve capital technology. Some
improvements have been, computers,
robots, and lasers
Entrepreneurship
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The organizer, the person who
organizes the factors of production.
They invest the money, and take the
risks in order to make a profit on their
investment.
Productivity
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The measure of how much can be
made with a set amount of resources.
Concentrates on keeping waste to a
minimum. Relies greatly on
accountability.
Ways to increase
productivity
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Job training for workers
Better organization of business.
Reorganizing is also called
downsizing.
Worker input, or ideas from workers.
This is called site-based management.
New technology
Factors that contribute to
high productivity in the
US
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High quality of resources
Lack of cultural barriers
Unified as one country, the states are
under one government
Advanced infrastructure—roads,
bridges, and transportation systems
An overall stable climate.
Division of labor
 enhances productivity; this is dividing the
product making process into separate
jobs
Specialization
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is becoming an expert in one part of the
production process. This helps to utilize
a workers talents and abilities. Being
trained in only one job speeds up
production. Examples are, doctors,
lawyers, and teachers.