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What is economics?
 Economics: the production, distribution, and
consumption of goods and services. “The
Economy” is the exchange of goods and
services in a community.
 Capitalism: when “economics” is primarily a
function of individuals and private
corporations, NOT the state.
CAPITALI$M
Key Economic-Political Questions
 Who should decide what goods and
services will be produced?
 Individuals (private) or the govt. (public)?
 How should goods and services be
distributed and exchanged within a state?
 Should the govt. try to “spread the wealth”?
 What social services should a govt.
provide?
 Should the govt. establish a “safety net” to help
the “losers” in capitalism?
The Basics to ALL Economies:
The 4 Factors of Production
Land
Labor
• ALL natural resources
(water, farming,
mining, forestry, coal,
oil, etc.).
Capital
Entrepreneur
• Human-made resources that
are used for economic activity.
• Money, buildings, machines,
computers, knowledge/skills.
• A person with the drive to
combine land, labor, and
capital resources to produce
goods and/or offer services.
Origins of Capitalism
 Adam Smith’s The Wealth of Nations (1776)
argued that when all individuals are free
to pursue their own private interests, an
“invisible hand” works to promote the
general welfare.
 The govt. should play a very limited,
laissez-faire (“hands off ”) role in society:
defense and foreign relations, and police
and courts to protect private property,
health/safety, and the free market.
Capitalism in the U.S.
 NO nation has a truly laissez-faire, free
enterprise system.
 Most capitalist nations, like the U.S., have
a MIXED economy (private enterprise +
govt. participation/regulation).
 Most people believe that the govt. should
have a stake in “promoting the general
welfare” of the people.
OUR Economic System:
The Free Enterprise System/Capitalism
Private Ownership
Individual Initiative
• The factors of
production are owned
by individuals, NOT
by the public (govt.)
• NOT centralized govt.
decision-making about
the economy
Profit
Competition
• This is the reason
entrepreneurs are willing to
take risks!
• This creates free markets:
consumers, workers, and
entrepreneurs all have
freedom of choice
More about Competition…
 In a free enterprise economy, prices are
determined by the Law of Supply and Demand.
 When demand for a product goes UP, prices go UP.
 When supplies of a product go UP, prices go DOWN.
(Think iPods and iPhones.)
 Competition helps to hold down prices AND
keep product quality high because consumers
try to buy the best product at the lowest price.
 The govt. keeps competition in the marketplace
by preventing and breaking up monopolies
(companies that have a stranglehold on a
certain market).