Economic Systems and the American Economy Ch.2

Economic System

Way in which a nation uses its resources to satisfy its people's needs and wants.

What are the 3 basic questions that economic systems must answer?

1. What (and how much) should be produced?
2. How should it be produced?
3. For whom should it be produced?

What (and how much) should be produced?

#NAME?

How should it be produced?

Involves deciding what combination of resources (land, labor, capital) is most effective/efficient

For whom should it be produced?

How goods and services are distributed

What economic systems must answer the three basic questions?

All economic systems

What are the types of economic systems?

Traditional, command, and market

Traditional Economy

System in which economic decisions are based on customs and beliefs that have been handed down from generation to generation

Command Economy

System in which the government controls the factors of production and makes all decisions about their use

Market Economy

System in which individuals own the factors of production and make economic decisions through free interaction while looking out for their own and their families' best interests

Market

Freely chosen activity between buyers and sellers of goods and services

Mixed Economy

System combining characteristics of more than one type of economy

What are 3 other names for a market economic system?

Capitalism, laissez-faire system, and free enterprise system

Who is Adam Smith?

An economist who wrote a book on a system in which government has little to do with a nation's economic activity.

Invisible Hand Theory

Individuals left on their own would work for their own self-interest. In doing so, they would be guided as if by an "invisible hand" to use resources efficiently and thus achieve the maximum good for society.

What are the basic characteristics of the American economy?

Limited role of government, freedom of enterprise, freedom of choice, profit incentive, private property, and competition

What are the six economic goals?

Efficiency, growth, stability, security, equity, and individual freedom.