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

 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. Government’s Role: Small
C. Economic Plans: None
D. Income Distribution: None
E. Controlling Prices: None- Market Controlled
F. What’s the incentive? Profit

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

Based off the above descriptions, does the U.S. have a
purely free market system?

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


Five Features of Capitalism…
1. In capitalism, individuals have the right to own
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
 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…


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


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

 Fund

 Establish their own research institutions
 Ex.


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 are side effects of an action that affects the

well being of a third party
Give an example of a negative externality…

hand smoke
Property value decreases due to a neighbor’s
poorly kept yard
Give an example of a positive externality…


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

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