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Chapter 2 Economic Systems by huanghengdong


									Free Enterprise in the United

       Chapter 2 Notes
Free enterprise vs. Communism
 What  makes a market economy, or
 a free enterprise system, different
 from the economic system in Cuba
 or in the former Soviet Union?
   Free Enterprise System
 Free  Enterprise means that people in
  their economic roles are free to make
 The U. S. has this type of economic
 Political freedom = economic freedom
  Characteristics of a Market
 Private Property
 Free Enterprise
 Self-interest
 Competition
 System of Markets and Prices
 Limited Government
The 6 Pillars of Free Enterprise
 The Pillars act as incentives:
1. Private Property - the right to
 own property (capital & other
 resources owned by individuals or
 businesses rather than
 governments) is guaranteed by the
 U.S. Constitution
The 6 Pillars of Free Enterprise
 2. Specialization – is a process in which
  businesses & people focus on
  producing one or a few parts of an
  entire product
 3. Voluntary Exchange – specialization
  leads to voluntary exchange; people
  must buy & sell products to acquire all
  the things they want
The 6 Pillars of Free Enterprise
 4.   The Price System- uses monetary
    prices as a message system (or
    “signals”) to facilitate exchanges
    between buyers & sellers

 5.  Market Competition- the rivalry
    among buyers & sellers in the purchase
    and sale of resources & products
   a. Competition in markets for resources
   b. Competition in markets for products
The 6 Pillars of Free Enterprise
 6. Entrepreneurship – is the motivation
  that drives business leaders to compete
  & react to changing conditions in the
  *Limited government involvement
  *Private property ownership is an
  incentive to entrepreneurship
Types of Economic Systems
1. Command system
   a. government holds most property rights
   b. issues commands to make the “what,
   how & who” choices
2. Traditional economy
   a. rely on traditions or customs to make
   the “what, how & who” choices
   b. roles are passed down by ancestors
Types of Economic Systems
3. Market systems
  a. individuals, not the government, holds
  owns most property
  b. individuals, not the government decide how
  to make the “what, how & who” choices
4. Mixed Market systems – closest to the
  market economy with government
  regulation (all economies are mixed
  economies today)
    The Circular Flow Model
         (see page 23)
 Households    - includes everyone
 living in the U.S., play 2 important
 1. Consumers - use the goods &
 services that businesses produce
 2. Resource Owners - owners of all
 the economy’s resources labor &
 other productive resources)
The Circular Flow (Parts):
 Goods   & Services (or Products)
 Market- when households exchange
 money for the goods & services
 businesses produce
 Resource Market- when households
 exchange their labor & other resources
 in the resource markets for money to
 spend in the goods & services
 (products) markets
The Circular Flow (Parts):
 Other  actual parts of the flow -
  consumer savings & business
  investments as well as the government
 (The Circular Flow is actually a dual
  flow - money flows in one direction,
  and resources, goods & services
  flow in the other)
   Three Functions of Money
 1. Medium of Exchange- accepted
  (or exchanged) in return for most
  goods & services
 2. Store of Value- can be saved for
  future buying power
 3. Measure of Value (or prices)-
  money indicates the relative value of
  products and resources
    The Goals of the U. S.
  Economic System (p. 29):
1.   Full employment

2.   Economic growth

3.   Price stability
        The Goals of the U. S.
         Economic System
 4.   Economic freedom

 5.   Economic security

 6.   Equity

 7.   Efficiency
   Adam Smith & The Wealth
         of Nations
 1. laissez faire - to “let alone” or “hands
  off”; the principle that the government
  should not interfere with business
 2. Smith felt that there was an
  “invisible hand” that coordinated
  voluntary exchange in the economy
 3. Adam Smith is called the “father of
    John Maynard Keynes
 20th century economist
 Theories heavily influenced the
  “New Deal” of FDR’s administration
 Government should be involved in
  the economy and could revitalize it
  if needed

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