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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