Our Capitalist System

Chapter 2 & 3

The Questions
Every society (GOVERNMENT) has to answer three questions
about the production and distribution of goods.
1. What goods will be produced?

Produce products in order to satisfy the needs and wants

of its people (Who decides Here?)

2. How will goods be produced?

Decide how best to use its resources (Who decides here?)

3. Who consumes these goods?

Determined by how societies distribute income

(Who decides here?)

My Expertise
In order to have an efficient market, people specialize
Specialization allows people and businesses to focus on

a
Few good or service and do them really well
Ex. Doctor
Limited number of related products
Ex. Oil Producer

Three Types of Systems

1. Traditional
It is the oldest and simplest system
The economy is based on custom or ritual
Heavily

rely on being self-sufficient and restricts trades

There is little room for innovation or change
Ex. Amish

Three Types of Systems

2. Capitalism (AKA Free Market)
A. Resources owned by: Private individuals
B. Governments Role: Small
C. Economic Plans: None
D. Income Distribution: None
E. Controlling Prices: None- Market Controlled
F. Whats the incentive? Profit

Three Types of Systems

3. Socialism (AKA Command Economy)
A. Resources owned by: The Government
B. Governments Role: Huge
C. Economic Plans: Made by the government
- Quotas set by the government
D. Income Distribution: Government distributes income
equally
E. Controlling Prices: Government controls prices
F. Whats the incentive? The common good

So
Based off the above descriptions, does the U.S. have a
purely free market system?
NO

The United States has a mixed economy

Some government intervention
Providing vital services
Promoting the general welfare

Ex. Police, Judges, etc.

Limited regulation of the marketplace and private property

The Spectrum
Capitalism

Command

Five Features of Capitalism

1. In capitalism, individuals have the right to own
property
A. Private Property any good that is owned by an
individual or business
Ex.

House, Car, etc.

B. Public Property any good that is owned by the

government
Ex.

Library, Court House, etc.

Five Features of Capitalism

2. Economic Freedom
Workers have the right to choose where they will work and

for whom
Businesses have the right to choose the products they

produce and offer to sell

Legal Equality- Everyone has the same legal rights

Five Features of Capitalism

3. Voluntary Exchange
Individuals have the right to make a trade that they believe

will make them better off

4. Competition = GOOD
Workers Get higher wages
Consumer get

A.
B.
C.
D.

Better prices
More selection
Improved quality
New products

Five Features of Capitalism

5. Economic Incentives
Incentive Something that encourages or motivates a

person to action
What acts as an incentive in our society???
Money, Money, Money

An Additional Thought
Invisible Hand Principle
If you leave the market alone, it will regulate itself
Meaning NO government intervention

The Role of Government in Capitalism

Protect property rights and contracts
Provider of non-excludable public goods
Services that benefits the public that cannot be withheld
Ex. National Defense, Traffic lights, etc.

Protect the well-being of consumers

Make sure that producers provide consumers with

information

The Role of Government in Capitalism

What are the four goals of the government to promote a

strong economy?
High employment
2. Economic growth
3. Stability and security
4. Promote innovation and invention
1.

Fund

research
Establish their own research institutions
Ex.

NASA

Grant patents and copyrights

The Negative Side

The negative effects of government regulation are
Rules are costly to implement
Regulations hinders competition
Increase government spending
Workers

have to be hired to oversee the regulations

Another Problem Free Rider

People who receives the benefits of a good or service
without paying for them

Externalities
Externalities are side effects of an action that affects the

well being of a third party

Give an example of a negative externality
Second

hand smoke
Property value decreases due to a neighbors
poorly kept yard
Give an example of a positive externality
Flu

Vaccine
Education

Circular Flow of Economic Activity

Profit and Loss

Total Revenue = Price * Quantity
Total Cost = Average Cost * Quantity
Average Cost = Total Cost / Quantity
Profit/Loss= Total Revenue Total Cost
What is the relationship between profit and loss?

Profit = TR > TC

Loss = TR < TC

Example
Suppose you wash and wax cars in your neighborhood and
charge $15 per car. Your material cost you $2 per car. If
you wash and wax 3 cars in one day, what are your
average cost, total cost, and total revenue? Do you make
a profit or a loss?
Total Cost = 2 * 3 = 6
Total Revenue = 15 * 3 = 45
Profit/Loss = 45-6 = $ 39 Profit