Transcript Free Market, Capitalism, and Free Enterprise

Free Market and Capitalism
How do the different types
of economies work together
in the world market?
Types of Economies
• Traditional economy
• Is an original economic system in which traditions, customs, and beliefs
shape the goods and the products the society creates.
• Ex: Indigenous tribes of Indonesia
• Command economy
• decisions regarding production and investment are decided by the
government.
• Ex: Communist countries China, North Korea, Cuba, Russia
Free Market Economy
• A market system in which the prices for goods and services are set
freely by consent between sellers and consumers, in which the laws
and forces of supply and demand are free from any intervention by a
government, price-setting monopoly, or other authority.
• Typically entails support for highly competitive markets and private
ownership of productive enterprises.
• Free enterprise- system where competition is allowed to flourish with
little government interference
Mixed Economy
• Both the private sector and state direct the economy, reflecting
characteristics of both market economies and planned economies.
• Mixture of public and private enterprises or business
• Governments in mixed economies often provide environmental protection,
maintenance of employment standards, a standardized welfare system, and
maintenance of competition.
The Market Economy
• U.S.= Free enterprise with some restrictions
• Therefore it is a mixed economy
• 6 Characteristics of a pure market economy
1. Little to no government interference
2. Freedom of enterprise
• Individuals are free to own and control the factors of production
3. Freedom of Choice
• Buyers make the decision about what should be produced
4. Private Property
5. Profit Incentive
• The desire to make a profit
6. Competition
• Rivalry between companies with similar products to win more business by
offering the lowest prices or best quality
Adam Smith
• The Wealth of Nations (1776)
• Scottish philosopher
• Known as the “father of modern economics”
• Laissez-faire economics
• Policy of minimal government interference in the economic
affairs of indivdiuals and society
• Capitalism
• Economic and political system where a country’s trade and
industry are controlled by private owners for profit, rather than
by the state.
What roles do business
organizations play in the US
economy?
Business Organizations
• Sole Proprietorships
• A business owned by one person
• The oldest, and most common form of business organization
• Proprietor
• The business owner
• Partnership
• Business operated by two or more people
• Partners may bring financial capital to the business to help it grow
• Partnership Agreement
• Legally binding agreement that sets the duties (jobs) of each partner, the division of
profits, and the distribution of assets should the partnership end
• Limited Partnership
• One partner is responsible for running the business and the other just contributes financially
Business Organizations
• Corporation
• Organization owned by many people but treated by the law as though it were a person
• It can own property, pay taxes, make contracts, sue and be sued, etc.
• Stockholders
• People that own a part of a company that issues the stock
• Most important type of business organizations
• 3 ways to form a corporation
1. Register their company with the government
2. MUST sell stock
3. Must elect a board of directors
• File an articles of incorporation, if approved, the state gives you a corporate
charter (license to operate from the state)
THE FEDERAL RESERVE (THE FED)
• http://www.youtube.com/watch?v=CiyKoM4R0nA
• The Federal Reserve System is the central bank of the US
• An instiution that lends $ to other banks and where the government does its banknig
business
• 12 Regional Federal Reserve Banks
• Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis,
Minneapolis, Kansas City, Dallas, and San Francisco
• It was created in 1913 and is ruled by a Presidentially appointed Board of
Governors
• 7 from the Board of Governors and 5 Regional Presidents
• Once in place the President and Congress have little control over the board
• This is done so they can make decisions independent of political pressure, very similar to the justices
of the Supreme Court
THE FED
• The fed has several advisory counsels who study the economy and report to the
board of governors
• The major policy-making group is called the Federal Open Market Committee
(FOMC)
• Decisions that manipulate the money supply (12 members)
II. Function of the Fed
• The Fed oversees and regulates member banks--- they have the power to stop a
merger between 2 large banks if they think it will lessen competition
• The Fed also enforces laws that deal with consumer borrowing
THE FED
• The Fed acts as the government’s bank in three ways:
1. It holds all of the gov. money
2. Sells US treasury bills when gov. wants to borrow money from the
American people
3. The Fed issues our currency and controls its circulation
-
Banks send damaged money to the Fed so it can be destroyed and reissued
III. Conducting Monetary Policy
• Monetary Policy-policy that involves changing the rate of growth of
the money supply in order to affect the cost and availability of
credit
•
One of the Fed’s main responsibilities
THE FED
A. Changing the Supply of Money
• There are three things the Fed can do to change interest rates in the economy
by manipulating the money supply
1. The Fed can change the discount
1.
Rate the Fed charges to borrow money
•
If the Fed increases the discount rate, it is now more expensive for banks to
borrow money from the Fed—this will decrease the money supply and
contract the economy
• A decrease in the discount rate will decrease increase the money supply and
expand the economy
2. The Fed can change the money supply through the reserve requirement quota
•
•
The % of total deposits that a bank must have on hand at the end of the day
Higher reserve will decrease the money supply while lower will increase the money supply
THE FED
3. The Fed change the money supply through open market operations
• The purchase or sale of gov. bonds or Treasury bills
• Selling gov. bonds and bills will decrease the money supply
• Buying them will increase the money supply
• An increase in the money supply will expand the economy by
lowering interest rates
• A decrease of the money supply will contract the economy by raising
interest rates
How Banks Operate
Banking Services
• Banks are started by investors who pool their financial assets to
provide banking services to people in the community
• Much of those assets have to go for things such as rent, furniture, and
other expenses
• The rest would be available to loan money to people in the
community
• Bands cannot rely on the funds of their founders to survive, they
must attract depositors
Accepting Deposits
• Checking account- an account in which deposited money can be
withdrawn at any time by writing a check or using a check card
• People generally do not keep money in these accounts long
• They use them temporarily hold funds they need to pay for living expenses
• Most banks today pay a very small amount of interest on checking accounts
• Savings account- an account in which customers receive interest
based on how much money they have deposited
• These pat a little bit higher rate than checking accounts.
• People tend to leave money in these accounts longer
Accepting Deposits
• Certificate of Deposit- timed deposit that states the amount of the
deposit, maturity, and rate of interest being paid
• Pays higher rates of interest than savings accounts, but it usually take more
money to open the account and you lose access until the maturity date
Making Loans
• Another principal activity of banks is to lend money to consumers and
businesses
• As we learned, loans can increase the money supply
II. Changes in the Banking Industry
• The Fed was not the first central bank of the US
• The original bank of the US was chartered in 1791- lasted until 1811
• The second bank of the US was chartered in 1816, it didn’t last long
• Both banks failed because of pressure from the states who wanted to
handle their own banking
Loans
• Until the civil war, state banks issued their own currency
• In 1863, the National Banking Act was passed to allow federally
chartered private banks
• They issued national banknotes
• Once the Fed was created, they began issuing Federal Reserve Notes
which became the standard form of currency in circulation
• During the Great Depression many banks failed
• In 1928 there were 26,000 banks, in 1933 only 14,000 remained
Banks
• President Roosevelt declared a “bank holiday” and only allowed them
to reopen when they could prove that they were financially sound
• The Glass-Steagall Act was passed creating the FDIC which is now our
depositors insurance
• In the 1980s there was some gov. deregulation of the banking
industry that allowed Saving and Loan banks to make more riskey
loans, as a result many of them failed in the late 1980s and early 90s
• Because the deposits were FDIC insured the gov. had to bail them out and it
cost the gov. over $200 billion
• In 1999 the Gramm-Leach-Bliley Act was passed that allows banks to
engage in other activities such and insurance and securities
Non Profit Organizations
• Use surplus revenue to achieve its goals rather than distributing them as
profit
• Although they make profit, they must use revenue for self-preservation,
expansion, or plans
Labor Unions
• Represent worker in industries
• Collective Bargaining
• Process of negotiations between employers and a group of employees aimed
at reaching agreements to regulate working conditions
• Wages, benefits, and working conditions for their members, and represent
members in dispute with management over violations of contracts
True/False
1. The United States has a mixed economy.
2. In a mixed economy, the government does not interfere with business.
3. The Federal Trade Commission doesn’t care whether companies merge
together.
4. The more companies merge together, the more competition there is.
5. The government protects competition by letting companies do whatever
they want.
Why is Monetary Policy Effective?
• Monetary Policy is effective because it can be changed very quickly to
react to changes in the economy
• Fiscal Policy takes much longer because it has to wait for Congress to
make and pass laws
NC Industries
Directions: In groups you will create a poster displaying one of the six
biggest industry in North Carolina. Each group will be given a basic
overview sheet of each industry so some extra research may be
required. Each poster must contain:
1. The name of the industry
2. Where in NC the industry is located
3. What the industry does
4. The impact the industry has on the economies of NC, US, and the
world
5. Picture representing the industry