Download The American Economic System

Types of Economies
Basic Economic Unit Part II
Types of Economic Systems
Traditional


 How they always
Little Change
Based on Custom have been answered
Command
Socialism
Socialism: Government controls
major industries and distributes
many needs and wants
Communism

Socialism with a dictatorship.
Government controls everything
How do command economies answer
the basic economic questions?

The Government does
Market
Characteristics


Private Individuals control factors of
production
Individual freedom to make choices
Basic Economic Questions

Interaction between producers and
consumers
All economies are actually mixed.
What determines whether an
economy is considered market or
command depends on the level of

Government involvement.
Centrally Planned vs. Free Market
North Korea, United States, Cuba,
Germany, China
More Gov.
Less Gov.
Socialist or Market?





“Proposed increase in minimum wage”
“Oil prices soar because of Middle East
unrest”
“Stock prices plummet due to concerns
over European markets”
“FDA recalls Butterball Turkeys Over
Salmonella concerns”
“Recent freeze could lead to increase in
cost of strawberries”
Market

The exchange of goods and
services between buyers and
sellers
What does the Circular Flow Model
illustrate?
Factor Market

Where productive resources 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
What happens when more is
exchanged?

Economy grows
What can we use to measure the size
of the economy?
GDP
The Dollar value of all FINAL
goods and services produced
in a nation in a year.
What is productivity?

The amount of output that can
be produced by a set amount of
resources in a given period of
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
Specialization and Trade
Fish
Pineapple
Jake
20
30
George
15
50
What do these practices create
between individuals, communities
and nations?

Economic Interdependence
dependence between
people for goods and
services
Characteristics of Capitalism


Free Enterprise – Competition
with little government interference
Freedom of Choice – individuals
can choose what work to do and
what to buy (creates Consumer
Sovereignty in the market)



Private Property – right to own
and use our property how we
choose within certain legal limits.
Provides incentives to take care of
and invest.
Profit Incentive – (Self-Interest)
the driving force of capitalism, the
ability to accumulate wealth
Competition – (the regulator) the
struggle between buyers and sellers
to get the best products at the best
prices
Origins and Characteristics of
Economic Theory

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’s only
economic role is to
ensure
competition

The Invisible Hand


Belief that
individuals left on
their own would
work for own selfinterest
Would be guided
by “invisible hand”
to use resources
efficiently
(Government
needs to do little)
Invisible Hand
Self-Interest + Competition
=
Higher Quality + Lower Prices
=
Most Efficient Use of Resources
Karl Marx

Father of
Communism
Das Kapital
Exploitation of
the working
class
Failure of Capitalism
The ‘haves’ and
the ‘have nots’
Class Conflict
Capitalists (Owners
of the means of
production)
And
Workers
Capitalism’s Fall
Fault of Communism
John Maynard Keynes
Established a
new role of
government in
a Capitalist
economy.
Way out of Depression
Government to
start spending
Franklin D. Roosevelt
Public Works
Program