Capitalist and Mixed Systems

Key Terms

scarcity, traditional economy, command economy, market economy, factors of production, entrepreneur, monopoly, profit, mixed economy

Find Out

• Why can the economy of the United States be called a mixed economy?

• What are the characteristics of capitalism that differentiate it from socialism and communism?

Capitalist and Mixed Systems

Understanding Concepts

Free Enterprise What kinds of economic choices do individuals make in a free enterprise system?

Section Objective

Identify the factors of production in economic systems and the chief characteristics of capitalism.

In 1776 Adam Smith described capitalism as an economic system controlled by an “invisible hand.” According to Smith, through self interest this invisible hand moves people to decide what goods and services to produce, how to produce them, and to whom to distribute them. Adam Smith’s ideas were popularized in his book The Wealth of Nations, which was published in the same year the United States declared its independence.

A. The resources of an economic system are called factors of production.

I. Factors of Production (pages 717–718)

B. Factors of production fall into four categories:

1) land,

2) labor,

3) capital,

4) entrepreneurs.

Are all of the factors of production equally important in the economy? Explain.

If any factor is less important, it is still essential to production.

I. Factors of Production (pages 717–718)

A. Three major forms of economic organization represent the range of economic systems that determine how the factors of production are allocated.

II. Forms of Economic Organization (page 718)

B. Communism is a command economic system.

C. Socialism is a partial command economic system.

D. Capitalism is an economic system in which individual producers and consumers make the economic decisions in free markets.

II. Forms of Economic Organization (page 718)

II. Forms of Economic Organization (page 718)

What do you think are the advantages and disadvantages of a communist system? Explain.

Answers will vary. Lack of incentives, central planning, little individual freedom.

A. In the United States and several industrial countries, capitalism is the basic economic system.

III. Characteristics of Capitalism (pages 718–721)

B. Capitalism, also called a free enterprise system, is based on private ownership and on individual economic freedom.

C. Capitalists range from small store owners, persons who own a few shares of stock in a corporation, to industrialists who own large factories, mines, and financial institutions.

D. Capitalism encourages people to become entrepreneurs.

E. Competition among sellers of products and services is another characteristic of capitalism.

F. Buyers, sellers, and workers have freedom of choice in a capitalist system.

G. The capitalist system is based on the profit motive.

III. Characteristics of Capitalism (pages 718–721)

III. Characteristics of Capitalism (pages 718–721)

What do you think are the advantages and disadvantages of a capitalist system?

Answers will vary. Free enterprise, private ownership, individual initiative, competition.

A. Capitalism in the United States contains some elements of a command economy.

IV.Changing Face of Capitalism (page 721)

B. Since the late 1800s, the federal government has increased its role in the economy.

C. The federal government has adopted regulatory laws to ensure competition and safety.

D. In Japanese capitalism, the government works closely with business to limit foreign competition. In South Korea, Singapore, and Taiwan the government has a similar close relationship with business.

E. Generally, the capitalist economies of Western European nations are more controlled and regulated than that of the United States.

IV.Changing Face of Capitalism (page 721)

IV.Changing Face of Capitalism (page 721)

How might the relationship between government and business change in capitalist nations during the twenty-first century?

Answers will vary. Discuss the increasing or decreasing role of government in economies.

1. Main Idea Use a graphic organizer like the one below to identify five characteristics of capitalist economies.

Checking for Understanding

private ownership, individual initiative, competition, freedom of choice, profit and loss

___ scarcity

___ entrepreneur

___ monopoly

___ profit

A. the difference between the amount of money used to operate a business and the amount of money a business takes in

B. a condition that exists because society does not have all the resources to produce all the goods and services that everyone wants

C. a person who takes a risk to produce goods and services in search of profit

D. a business that controls so much of an industry that little or no competition exists

Checking for Understanding

B

C

D

A

Match the term with the correct definition.

3. Identify communism, socialism, capitalism, free enterprise system.

Checking for Understanding

Communism is an economic system in which the central government directs all major economic decisions.

Socialism is an economic system in which the government owns the basic means of production, distributes the products and wages, and provides social services such as health care and welfare.

Capitalism is an economic system providing free choice and individual incentive for workers, investors, consumers, and business enterprises.

A free enterprise system is an economic system based on private ownership of the means of production and on individual economic freedom.

4. What are the three forms of economic organization that have emerged in the world?

Checking for Understanding

Communism, socialism, and capitalism are the three forms of economic organization that have emerged in the world.

5. How has the U.S. government played a growing role in the nation’s economy since the late 1800s?

Checking for Understanding

It has taken responsibility for the well-being of individuals and for the financial condition of the nation. It has assumed increasing responsibility for social policies.

6. Making Inferences How does the free market system promote freedom of choice for consumers in the United States?

Critical Thinking

Consumers are free to choose what products they buy. Consumers may choose from a variety of sellers and products.

Free Enterprise One of the issues debated by advocates of a planned economy and those who support a free market economy is whether there can be democratic freedoms such as freedom of speech without having economic freedom. Write an essay explaining the connection between economic freedom and civil liberties.