The American Economic System

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The American Economic System

• Basic Economic Unit Part II

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Types of Economic Systems
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Traditional

• Characteristics
• Little Change
• Based on Custom
• How answer the economic questions?
• How they always have

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Command

• Characteristics
• Government controls means of production
• Little individual influence
• Communism Socialism
• How answer the economic questions?
• Government does

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Socialism

• Gov. owns some factors of production and
  distributes products and wages

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Communism

• Socialism under the dictatorship of the communist
  party

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Market

• Characteristics
• Private individuals control the factors of
  production
• Individual freedom
• How questions answered?
• By businesses and consumers

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Mixed

• Characteristics
• Some individual freedom some government control
• How are questions answered?
• Individuals do but have some government
  intervention

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All economies are actually mixed. What determines
whether an economy is considered market or
command depends on the level of

• Government involvement.

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Who developed the principles of a market economy?

• Adam Smith

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What was the Wealth of Nations?

• Smiths book that explained the principles of
  Capitalism

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What did Smith mean by Laissez-faire economics?

• To let alone
• Government should stay out of marketplace except
  to ensure competition

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The Invisible Hand

• Belief that individuals on their own would work
  for own self-interest
• Would be guided by invisible hand to use
  resources efficiently

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Characteristics of Market/Free Enterprise System

• Little or no government intervention
  governments role in econ. is to ensure
  competition
• Free Enterprise Competition with little gov.
  interference
• Freedom of Choice individuals can choose what
  work to do and what we buy

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Characteristics Continued

• Private Property right to own and use our
  property as we choose within certain legal limits
• Profit Incentive the driving force of
  capitalism, the ability to accumulate wealth
• Competition the struggle between buyers and
  sellers to get the best products at lowest prices

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What does the Circular Flow Model illustrate?

• How resources, goods and services, and money flow
  in a circular pattern

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Market

• The exchange of goods and services between buyers
  and sellers

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Factor Market

• Where productive resources (the factors of
  production) are bought and sold

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Product Market

• Market where goods and services (finished
  products) are offered for sale

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What happens when less is exchanged in the
circular flow?

• The economy shrinks, productivity goes down

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What happens when more is exchanged?

• Economy grows, productivity increases

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What is productivity?

• The amount of output that can be produced by a
  set amount of resources in a given period of time

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Productivity

• Goes up when can produce the same amount of
  output in less time
• Or
• When can produce more output with same amount of
  resources in same time

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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

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What do these practices create between
individuals, communities and nations?

• Economic Interdependence creates dependence
  between people for goods and services