© 2009 Delmar, Cengage Learning Chapter 2 Agricultural Economics and the American Economy
Apr 01, 2015
© 2009 Delmar, Cengage Learning
Chapter 2
Agricultural Economics and the American Economy
© 2009 Delmar, Cengage Learning
Essential Questions
1. What is economics?
2. Evaluate the major economic systems.
3. How does economics function as both a large-scale and small-scale system?
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What is Economics?
• Economics is a social science that studies how consumers, producers, and societies choose among the alternative uses of scarce resources in the process of producing, exchanging, and consuming goods and services.
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Three Components of Economics
• Scarcity:– An economic term for a situation in which there are not enough
resources available to satisfy people’s needs and wants. • Resources:
– Inputs that society uses to produce outputs – natural, human, manufactured, and entrepreneurial.
• Wants & Needs:– Wants are things above and beyond what is required for daily
living.– Needs are essential to daily living (water, food, shelter).
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Types of Resources
• Natural Resources (Land)• Human Resources (Labor)• Manufactured Resources (Capital)• Entrepreneurship (Management)
– Goods and Services
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Three Economic Questions
• These are questions asked by all societies:– What goods should be produced, and how much of
each?– How should these goods be produced?– Who should get what and how much?
• The answers to these questions will determine the type of economic system each society will use.
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Combining the Economic Ingredients
To simplify the economic questions, assume all the goods and services in our society are represented by a pie.
1. What type of pie to produce?
2. What combination of ingredients to use?
3. How to divide the pie?
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Six “Major” Economic Systems
• Economists have identified six major economic systems:– Traditional– Capitalism– Fascism– Socialism– Communism (Command)– Mixed
• The major distinction between each classification is the degree of control by private individuals versus the group (or government).
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The Traditional System
• The traditional system answers the three basic economic questions according to tradition, or what has always been done.
• Economic decisions are based on customs, religious beliefs, and ancestry.
• These systems exist in limited parts of Asia, Africa, the Middle East, and Latin America.
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Capitalism
• In this economic society, individuals have free reign over their time and resources and can determine exactly how to use these assets, with few legal controls by the government.
• Ownership is private and the factors of production are controlled by the individual.
• Competition in the driving force in every economic activity and decision – the market forces determine prices and value.
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Socialism
• The founding idea of socialism (as an economic system) is public ownership of all productive resources.
• The government directs all decisions as to the utilization of resources.
• It is intended for the mutual benefit of all people and individual economic incentives are limited.
• Lack of free prices and free markets eliminates competition.
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Fascism
• In this system, productive property is owned by individuals.
• Use of this property reflects the preference of the government.
• Individuals have a high degree of economic power, IF they support the government in power.
• This system suppresses opposition, censors criticism, and denies freedom.
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Communism
• Totalitarian style of government in which a single authoritarian political park controls government-owned means of production.
• Private individuals have no control.• Everyone contributes according to ability. • Distribution is made according to need.
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Mixed Economic Systems
• Most societies reflect multiple aspects of different economic structures, thus being a “mixed” economy.
• Economic policy may change in a society due to war, times of hardship, or changes in leadership.
• America, though often said to be capitalistic, is actually a mixed economy.
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The American Economy
• Individuals have a great deal of economic control.
• However, the government guides production in many industries and regulates nearly all sectors.
• Government subsidies and grants act as incentives to increase or reduce production of goods and services.
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Father of Economy
• England was the major center of intellectual activity during the 18th century.
• Adam Smith – known as the Father or Founder of Economics.
• “The Wealth of Nations” responded to the economic environment in this period. A small percentage of people were wealthy, while the masses were extremely poor.
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The American System of Free Enterprise
• The American Economy has six major characteristics:– Little or no government control– Freedom of enterprise– Freedom of choice– The right to own private property– Profit incentive– Competition
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The Role of Government
• The Founders of the US originally limited the role of the government to national defense and keeping the peace.
• Recently, government’s role has increased to regulation of business and provision of public services.
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Free Enterprise• Free enterprise – economic system that
allows individuals to organize and conduct business with a minimum of government control; individuals privately own what they produce.
• Common term for US economic system.• Limits – Minimum age to work (ex. 16
years old) in most states and then limit of how many hours, Minimum wage, etc.
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Freedom of Choice
• Part of freedom of choice is freedom to fail. • Buyers make the decisions about what to
produce.• Success or failure of a good or service
depends on the individuals freely choosing what they want.
• Government sets law to protect buyers – safety standards such as labels and tags.
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Private Property
• Private property – what is owned by an individual or group rather than by the federal, state, or local government.
• Individuals have the freedom to buy whatever they can afford.
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Profit Incentive
• Profit incentive – the desire to make a profit.
• The goal of a profit is what prompts people to produce things that others want to buy.
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Competition
• Producers or sellers of goods hope to win more business by offering lower prices or better quality.
• Success depends upon the ability to produce products at a price the average consumer can afford.
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Macroeconomics vs. Microeconomics
• Economics is most often looked at in two ways: Macro (large scale) and Micro (small scale)
• Macroeconomics studies factors on a national scale and is most concerned with the following:– Gross domestic product, aggregate supply, aggregate demand,
unemployment, inflation and deflation, monetary policy, and fiscal policy
• Microeconomics considers individual markets and is most concerned with the following:– Markets and prices, supply and demand, competition and market
structure, income distribution, business failures, and the role of government