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ECO365 Week 3 Lecture Notes

ECO365 Week 3 Lecture Notes - Chapter 3 I The U.S economy...

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Chapter 3 I. The U.S. economy: While ultimately the U.S. economy’s strength is its people and its other resources, U.S. economy is far from perfect. II. The U.S. economy in historical perspective. A. The U.S. economy is a market economy, that is, it is an economic system based upon private property and the market in which, in principle, individuals decide how, what, and for whom to produce (Chapter Objective 1). 1. Under a market economy: a. Individuals are encouraged to follow their own self-interest, while market forces of supply and demand are relied upon to coordinate those individual pursuits. b. Distribution of goods is to each according to his or her ability, effort, or inherited property. c. Markets require private property rights – the control a private individual or firm has over an asset or a right. d. Government allocates and defends property rights. 2. How markets work. a. Markets work through a system of rewards and payments. b. Individuals are free to do whatever they want as long as it is legal. c. Prices coordinate individuals’ wants. If there’s not enough of something, its price goes up. If there’s too much, price goes down. 3. Most economists believe the market is a good way to coordinate individuals’ needs. The primary debate among economists is about how markets should be structured, and whether they should be modified and adjusted by government regulation. B. Capitalism and socialism. 1. Socialism is, in theory, an economic system based on individuals’ goodwill toward others, not on their own self-interest. 2. In principle, with socialism, society decides what, how, and for whom to produce (Chapter Objective 2). It tries to organize society the way families are organized. If individuals’ inherent goodness will not make them consider the general good, government will force them. 3. Capitalism is defined as an economic system based on the market in which the ownership of the means of production resides with a small group of individuals called capitalists.
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4. Socialism in practice is often called Soviet-style socialism — an economic system that embodies both political and economic systems, uses administrative control or central planning to solve the coordination problems of what, how, and for whom. History has shown that economic systems based upon people’s goodwill have tended to break down. C. Economic systems have evolved over time. 1. Feudalism is an economic system in which traditions rule. It dominated the western world from about the 8th to the 15th century. 2. Feudalism gave way to mercantilism, an economic system in which government determines the what, how, and for whom decisions by doling out the rights to undertake certain economic decisions. 3. The Industrial Revolution — a time when technology and machines rapidly modernized industrial production and mass-produced goods – reduced the power of mechantilists and paved the way for capitalism.
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ECO365 Week 3 Lecture Notes - Chapter 3 I The U.S economy...

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