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Economic Systems in the
United States
SOL GOVT.14 The student will demonstrate
knowledge of economic systems
SOL GOVT.15 The student will demonstrate
knowledge of the United States market
economy.
SOL GOVT. 16 The student will demonstrate
knowledge of the role of government in
Virginia and United States economies
Traditional Economy
An economy based on traditions, customs & beliefs
*People often perform the same type of work as their
parents and grandparents regardless of their ability or
potential
*Usually fishing, hunting, farming ; considered a
primitive economic system
*May use bartering (trading) instead of money
*Little surplus is produced, but if there are extra goods
they are typically given to the ruler or landowner
Located in “Third World” countries with emerging
markets : Africa, Asia, Latin America, Middle East
Command Economy
Vision of Karl Marx
An economy found in Communist & Socialist nations
where supply and price of goods are regulated by the
government rather than market forces.
*Government planners decide which goods and services
are produced and how they are distributed.
The former Soviet Union was an example of a command
economy; also North Korea, Cuba, Vietnam, and China
(although it is quickly becoming a “mixed economy”)
Scandinavian nations have elements of this system
(Norway, Sweden, Finland. Denmark)
Socialism
• Some factors of production are
directly owned by the people,
like oil, gas, and other utilities.
• The government collects the
profit in lieu of corporate taxes.
It distributes these profits in
government spending
programs.
• Healthcare, education,
unemployment benefits
provided to the people.
Where Socialism
Differs from
Communism:
*It does not favor
the violent
overthrow of
capitalists by
workers.
*It does not
advocate the total
elimination of
private property
ownership, just
that excessive
wealth be
prevented.
Capitalism
1.
2.
3.
4.
An economic system characterized by
Private ownership of property & productive
resources
Profit Motive to stimulate production
of “goods and services”
Individual Initiative
Competition to ensure efficiency
*Laws of supply and demand to set
prices and level of production
Also called the “Free Enterprise System”
Law of Supply and Demand
Law says that the price for an
item is affected by the
availability of that product
(supply) and the desire of
consumers to buy it (demand)
Law of Supply and Demand
Generally, if there is a
low supply and a high demand
the price will be high
In contrast, with a
high supply and low demand
the price will be low
Equilibrium
The point
where
supply and
demand
meet,
which
determines
the price of
an item
Price
(Free) Market Economy
*An economy in which the prices of goods and
services are determined in a free price system.
*The essential feature of a market economy is the
total freedom of individuals and businesses to
choose the goods and services they want to buy
according to their tastes and preferences, without
interference from government.
*The decisions of what to produce are addressed by
the forces of the market, namely the supply and
demand of a particular commodity in question.
Adam Smith’s “Invisible Hand” says the market
is self-regulating ... is it?
U.S. Market
Economy
The U.S. market economy has been
deemed one of the most efficient
economies in the world with limited
government oversight
Historically, it has had
*the lowest inflation rates
*low rates of unemployment
Mixed Economies
Economic systems in which both the state and
private sector are involved in the economy,
reflecting characteristics of capitalism,
socialism, and planned command economies.
Many mixed economies (like the U.S.) are
market economies with strong regulatory
oversight, in addition to having a variety of
government-sponsored aspects.
Most of the world’s economies today are mixed
Criticism of
Capitalism
Ford Pinto Fire Controversy
The ultimate purpose of capitalism is the
profit motive-to earn a profit!
So, it often disregards the needs of the
customer, employee, society and the
environment (unless those happen to align
with making a profit…)
Does the government have a responsibility
to regulate the “free market”??
Importance of
Entrepreneurs
One who organizes, manages, and
assumes the risks of a business or
enterprise
*Uses intelligence, drive and ambition
(“initiative”) to combine land, labor, and
capital ($) to produce goods and services
Types of
Business
Organizations
in Capitalism
Proprietorship: business form
when one owner takes all the risks
and profits of operating the
business
*Owner, aka “Sole Proprietor”
Types of
Business
Organizations
in Capitalism
Steve Wozniak
Steve Jobs
Partnership: form of business
organization with two or more
owners (“partners”) who share the
risks, profits, and decision-making
Types of
Business
Organizations in
Capitalism
Corporation: form of business
organization created and authorized by
law to act as a “person” and legally
endowed with rights and duties,
including capacity of succession.
Benefit: Stockholders not responsible for
debts of the corporation