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The American Free Market System. Economy. The system through which people in a society make choices about how to use their limited resources to produce goods and services. Scarcity. - PowerPoint PPT Presentation
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The American Free Market System
Economy
The system through which people in a society make choices about how to use their limited resources to produce goods and services.
Scarcity
The inability to satisfy all wants at the same time. All resources and goods are limited. This requires that choices be made.
Choice
Selecting an item or action from a set of possible alternatives. Individuals must choose/make decisions about desired goods and services because these goods and services are limited.
Opportunity Cost
What is given up when a choice is made—the highest valued alternative foregone. Individuals must consider the value of what is given up when making a choice.
Resources
Factors of production that are used in the production of goods and services. Types of resources are natural, human, capital, and entrepreneurship.
Price
The amount of money exchanged for a good or service. Interaction of supply and demand determines price. Price determines who acquires goods and services.
Incentives
Things that incite or motivate. Incentives are used to change economic behavior.
Examples?
Demand
The amount of a good or service that consumers are willing and able to buy at a certain price.
Supply
The amount of a good or service that producers are willing and able to sell at a certain price.
Interaction of Supply & Demand
Determines price.
Supply and Demand for the Hand Held All-American Game System
Quantity Supplied Price Quantity Demanded
0 $ 10 150
2 129
8 $ 30 98
19 $40 70
30 $50 50
50 $60 29
72 $70 19
100 $80 8
125 $90 2
150 $100 1
Production
The combining of human, natural, capital, and entrepreneurship resources to make goods or provide services.
Consumption
Using goods and services. Consumer preferences and price determine what is purchased.
Free Markets
Markets that are allowed to operate without undue interference from the government.
Private Property
Individuals and businesses have the right to own personal property as well as the means of production without undue interference from the government.
Profit
Profit consists of earnings after all expenses have been paid.
Competition
Rivalry between producers/sellers of a good or service results in better quality goods and services at a lower price.
Consumer Sovereignty
Through their purchases, consumers determine what goods and services will be produced
Proprietorship
A form of business organization with one owner who takes all the risks and all the profits.
Partnership
A form of business organization with two or more owners who share the risks and the profits.
Entrepreneur
A person who takes a risk to produce goods and services in search of profit
Corporation
A form of business organization that is authorized by law to act as a legal person regardless of the number of owners. Owners share the profits. Owner liability is limited to investment.
3 Types of Economies
Basic Economic Questions
What and how much to produce? How to produce goods and services? Who will get what is produced?
The type of economy a govt. has is determined by how it answers the above questions.
Economies
Free Market Command Mixed
Market Economy Characteristics
Private ownership of property and resources
Profit Competition Consumer sovereignty Individual choice
What and how much to produce?
Answered by consumer sovereignty and supply and demand.
How to produce goods and services?
Determined by individual business owners
Who will get what is produced?
Those with higher paying jobs will buy more of the goods and services than those who don’t.
Command Economy Characteristics
Central (govt.) ownership of property and resources.
Centrally-planned economy Lack of consumer choice
Basic decisions answered by the government
In this type, the government owns important parts of the economy and they decide what and how much of a product will be produced.
The “goods” usually go to a dictator or are split up equally among the citizens.
Mixed Economy Characteristics
Individuals and businesses as decision makers for the private sector
Government as decision maker for the public sector
A greater government role than in a free market economy
Most common economic system today
Modern – Day Economies
Today most economies are mixed, or they contain a mixture of command and market economies.
Free markets
Allowed to operate without undue interference from the government.
Private property
Individuals have the right to own personal property as well as the means of production without undue interference from the government.
Profit
Earnings after all expenses have been paid.
Competition
Rivalry between producers/sellers of a good or service results in better quality goods and services at a lower price.
Consumer sovereignty
Consumers determine through purchases, what goods and services will be produced.
Economic Flow
Individuals (households) own the resources used in production, sell the resources, and use the income to purchase products.
Businesses (producers) buy resources; make products that are sold to individuals, other businesses, and the government; and use the profits to buy more resources.
Governments use tax revenue from individuals and businesses to provide public goods and services.
Individuals and businesses provide resources (land, labor and capital) that
businesses use to create goods
Businesses sell their goods to consumers in the market
place.
taxes
taxes
Public goods and services
Public goods and services
Consumers pay for goods and services received
Producers pay for resources received
Characteristics of Private Financial Institutions
Include banks, savings and loans, credit unions, and securities brokerages
Receive deposits and make loans
Encourage saving and investing by paying interest on deposits
Ways the government promotes marketplace
competition Enforcing antitrust legislation to
discourage the development of monopolies
Engaging in global trade
Supporting business start-ups
Government agencies that regulate business
FCC (Federal Communications Commission)
EPA (Environmental Protection Agency)
FTC (Federal Trade Commission)