Study Guide chapter 2



Study Guide chapter 2

• Introduction (page 33)

Each society has an economy, or economic system—a way of distributing goods and services to answer the WHAT, HOW, and FOR WHOM questions. Most societies in the world take part in one of three major economic systems—traditional, command, or market.

1. What role does an economic system play in society?

• Traditional Economies (page 33)

Major economic decisions are made according to custom in a traditional economy. For example, generations of Inuit in Canada taught their children how to survive by fishing and hunting and sharing their food with others. These traditions helped the Inuit survive for thousands of years. Life in a traditional economy like the Inuit’s is generally unchanging and predictable. The main drawback is that a traditional economy is not open to new ideas and ways of doing things.

2. What determined how the Inuit met their needs and wants?

• Command Economies (page 35)

A central authority, generally a government, makes the major economic decisions in a command economy. The central authority expects people in the society to go along with its decisions. A command economy can change its focus in a short period, depending on whatever the government calls for at any time. Another advantage to a command economy is that basic public services are provided at little or no cost. The disadvantages are little economic freedom and few consumer

goods. Cuba and Korea are two societies with command economies.

3. What do people give up in a command economy?

• Market Economies (page 36)

In a market economy, people and firms work in order to make their economic situations better. Governments with market economies include the United States, Japan, Germany, Canada, France, and Great Britain. In this kind of economy, most economic decisions are not made by the central government. Consumers’ decisions to buy act as votes that let producers know what to make. Advantages to a market economy include the ability to change gradually, much individual freedom, little government control, individual decision making, a wide variety of goods and services

and high consumer satisfaction. However, a market economy fails to provide directly for those who cannot take care of themselves. It also cannot provide for all the needs and wants of all people.

In addition, workers cannot always count on keeping their jobs and businesses cannot always count on making money.

3. What feature stands out more in market economies than in other kinds of economies?

Use the diagram below to help you take notes as you read the summaries that follow. Think

about the relationship between the different economic goals.

2, 2

Economic and Social Goals

Goal Description

Economic freedom

Economic efficiency

Economic equity

Economic security

Full employment

Price stability

Economic growth

Future goals

• Economic and Social Goals (page 41)

The social and economic goals of society in the United States include:

A. Economic freedom—the freedom of people to make their own economic decisions

B. Economic efficiency—careful use of resources to decrease the amount of resources that are wasted

C. Economic equity—people should be paid the same if they do the same kind of work; companies should not be allowed to say untrue things about their products

D. Economic security—protection from such things as layoffs and injuries that make people lose their jobs

E. Full employment—if people want to work, they should be able to find jobs

F. Price stability—prices should not increase too much so that people can afford goods

G. Economic growth—so that people can have more goods and services

The biggest threat to price stability is inflation, or a rise in the general level of prices. Inflation is especially hard for people on a fixed income, or an income that does not go up when prices go up. If the economy cannot reach these goals, then the government steps in. For example, the market system in the United States did not provide economic security for the disabled and elderly. So Congress set up Social Security—a federal program that helps retired people and persons with disabilities.

1. Why do you think people consider price stability important?

• Trade-Offs Among Goals (page 44)

Sometimes one goal goes against another goal. When that happens, society looks at the costs and benefits of each goal in order to decide which one is more important. For example, supporters of a minimum wage increase claim that it will promote economic equity. However, those who are against the increase argue that it will drive up unemployment and affect employers’ economic freedom. Election issues often show these conflicts and choices.

2. How might an increase in the minimum wage cause unemployment?

3.

capitalism A system in which private citizens own the factors of production (page 46)

free enterprise Economy in which competition is allowed to flourish with a minimum of government

interference (page 46)

voluntary exchange The act of buyers and sellers freely and willingly engaging in market transactions

(page 47)

private property rights The privilege that entitles people to own and control their possessions as they

wish (page 47)

profit The extent to which persons or organizations are better off at the end of a period than they were

at the beginning (page 48)

profit motive The driving force that encourages people and organizations to improve their material

well-being (page 48)

competition The struggle among sellers to attract consumers while lowering costs (page 48)

consumer sovereignty The role of the consumer as ruler of the market (page 50)

mixed economy/modified private enterprise economy -Economy in which people carry on their

economic affairs freely but are subject to some government intervention and regulation (page 51)

CAPITALISM AND ECONOMIC FREEDOM

DRAWING FROM EXPERIENCE

When you go shopping, do you enjoy choosing from a wide variety of products? Are you grateful for the opportunity to work at the job you choose? In the last section, you read about the goals of the economic system in the United States. This section focuses on the characteristics of the American economic system.

ORGANIZING YOUR THOUGHTS

Use the diagram below to help you take notes as you read the summaries that follow. Think

about how the five different characteristics of a free enterprise economy affect your life.

READ TO LEARN

• Introduction (page 46)

The American economy is based on capitalism. Capitalism is a competitive economic system in which people own the factors of production. The American economy is also called free enterprise because businesses compete with one another, and the government does little to stop this competition.

1. How might a government interfere with competition in the economy?

• Competition and Free Enterprise (page 46)

The five characteristics of capitalism are:

A. Economic freedom

B. Voluntary exchange

C. Private property rights

D. Profit motive

E. Competition

Examples of economic freedom include a worker’s right to choose an employer and a business’s right to hire and fire workers. Voluntary exchange means that buyers and sellers do business freely, or only if they want to. For example, a buyer may deposit money in a bank or use it to buy goods, and a seller can refuse to sell his or her goods for less than their worth. Private property rights allow people to own and control their belongings and abilities. For example, people decide whether or not to sell their belongings, such as cars or houses, or skills, such as the ability to fix cars. Profit is the extent to which persons or organizations are better off—financially or in other ways—after a business deal than they were in the beginning. The profit motive is the driving force in capitalism. In addition, capitalism depends on competition, or the struggle among sellers to attract consumers by lowering costs.

2. Besides money, how might a business measure profit? Explain your answer.

• The Role of the Entrepreneur (page 48)

The entrepreneur is the individual who uses land, capital, and labor for production in hopes of earning a profit. When an entrepreneur succeeds, everyone benefits. The entrepreneur receives profits, a business, and satisfaction. Workers are rewarded with jobs. Consumers have more or better products. The government collects more taxes, which it can use to build roads, schools, and improve people’s quality of life.

3. How might an entrepreneur’s success benefit you?

• The Role of the Consumer (page 49)

The concept that the consumer decides what goods and services are produced is called consumer

sovereignty. The dollars that consumers spend are the “votes” used to select the products that producers continue to make. There is a saying that “the customer is always right.”

This saying expresses the idea that customers’ choices determine what products sell well and which do poorly.

4. What do you think happens to products that receive too few consumer “votes”?

• The Role of Government (page 50)

To promote national goals, local, state, and national governments often have to participate in the economy. Governments protect consumers and workers. Governments also provide and buy goods and services, and they may control those goods and services in some ways. Many government functions in the United States show people’s wish to change the economic system in order to achieve economic goals. As a result, the United States has a mixed economy or a modified private enterprise economy. In this kind of economy, citizens are mostly free to carry on their economic affairs. However, they have to obey some government rules.

5. List some examples of goods and services that the federal and state governments provide for high school students.

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