Economic Systems

Types of Economic Systems—Discussion Guide

Slide #2-3 Opening Discussion (Entry)

• List as many 'Families' that you can think of that you are a part of.

• Define the word 'Family'

• How would you describe your own Family Unit?

Regardless of race, gender, or religion, just about everyone belongs to some type of family unit.

• • This family unit might be a traditional one, or it might be completely unconventional.

  • Some family units are related to each other by blood, some are a close-knit circle of friends, and some are simply people who live together or share common values.

  • Think for a minute about your own family unit.

  • How would you describe it?

  • How is it similar to or different from others in your community?

In spite of their differences, practically all family units have one thing in common.

• • They must decide how they will obtain income and how that income will be spent.

  • Countries are in the same situation.

• No two nations are exactly alike, but they all must decide what their resources are, what they can produce, and who will get the items that are produced.

• How does a country make these decisions?

• It all depends on the country's economic system.

KEY CONCEPTS

Slide #4 What are economic systems?

• Economic systems are the organized ways in which countries handle their economic
  decisions and solve their economic problems
• Each economic system contains resources, markets, participants, and a medium of exchange.
• Economic systems are needed because no country has enough resources to supply everything its people want or need, and people are interdependent.
• The major types of economic systems are traditional, command (divided into communism and socialism), and market.

Discussion #1: Ask students to give examples of resources, markets, participants and a medium of exchange.

Slide #5 What are the differences between economic systems?

• There are three basic economic questions that each economic system must answer.
• These questions focus on what will be produced, how products will be produced, and how products will be allocated.
• Each economic system answers these questions in a different way.

Slide #6 Traditional economies

• People living in a traditional economy produce the same things that were produced by their ancestors.
• The items they produce are needed to carry on their daily lives.
• They use the same methods of production as their ancestors.
  • They pass these methods down to their children.
  • If a hunter learned to hunt using a bow and arrow, for instance, he will teach that method to his children.
• People in a traditional economy use some of what they produce and share the rest with their community.
• Everything that is produced by the community is consumed by the community.
• There are no incomes, prices, or markets to consider in a traditional economic system.

Discussion #2: Ask students if they know any examples of traditional economies.

Slide #7 Communist command economies

• In a communist command economy, government owns the country’s resources and
  decides how those resources will be allocated.
• The government determines what will be produced.
• It bases its production plans on what it wants rather than on consumer need.
• Since the government is the major producer in a communist system, the government decides how to produce.
• Businesses are told what methods, workers, and factories to use.
• Government decides how to distribute products because it also decides what jobs workers do and what incomes workers receive.
• Consumer goods are often in short supply because resources are used to support
  government efforts such as the military or industrialization.

Slide #8 Socialist command economies

• Planning is done by the government, but supply and demand are taken into consideration.
• Planners decide whether to expand current production or save profits for future expansion.
• Government decides how certain basic products are produced.
• Other production decisions are made by private businesses.
• Consumers’ incomes determine what they can buy.
• People can choose what work they do, but wages are set according to the value of the work to society, as determined by the government.
• As a result, government influences workers’ incomes and their ability to purchase.

Discussion #3: Ask students if they know examples of socialist economies.

Slide #9 Market economic systems

• Consumers decide what will be produced by casting economic votes through their purchases.
• Price is the deciding factor.
• Producers strive to produce profitable goods and services that consumers want to buy.
• Producers use production methods that enable them to offer products at prices which are attractive to consumers.
• Competition is an important factor.
• Each producer tries to use resources as efficiently as possible to compete with other producers and maximize profits.
• Income determines who gets what in a market economy.
• Each person’s income level determines what s/he can purchase.
• Since income is based on the resources the consumer owns and supplies to the marketplace, people with highly valued resources have higher incomes with which to buy more or higher priced products.

Slide #10 What’s the problem?

• While most countries could not function without an economic system, every economic system has its problems.
  • Traditional: Limited growth opportunities
  • Communist command: Few and poor quality goods, lack of individual control
  • Socialist command: Less efficiency, high taxes
  • Market: Financial loss, legal problems, competition, and inequality

Discussion #4: Ask students to share more examples of problems that affect each of the types of economic systems.

Private Enterprise—Discussion Guide

Slide# 14-15 Opening Discussion (Entry)

• Define 'Private Enterprise' in your own words.

• What terms come to mind that relate to 'Private Enterprise?'

Sam wants to make a little extra money for her whitewater-rafting trip this summer.

• Graduation is coming soon, and many of her friends and classmates need senior pictures taken.

• Since Sam has taken photography classes, owns a nice camera, and plans to study photography in college, several people offer to pay her to take their senior photos.

• So, Sam prints up flyers advertising her services, and over three weeks’ time, she makes over $400!

• Sam’s business venture is an example of what can happen in a private enterprise system.

• She had the freedom to offer a product or service and to profit from it.

• This might seem reasonable to you, but not all economic systems allow such freedoms.

• Read on to find out more about how private enterprise systems work!

KEY CONCEPTS

Slide #16 What is a private enterprise system?

• In a private enterprise economic system, individuals and groups (rather than the government) own or control the economic resources.

Discussion #1: Ask students to give examples of marketplaces.

Characteristics of a private enterprise system

• Freedom in the marketplace:
  • While you may think of a “marketplace” as a specific location, in economic terms it refers to any place where the buying and/or selling of goods and services occurs.

• • The markets in private enterprise are self-regulated and self-controlled.
  • These businesses are free to choose things such as:
    • What they wish to produce
    • What resources to purchase
    • What techniques of production to use
    • How their goods or services will be marketed
    • What price(s) they will charge
    • When to close down or go out of business
  • At the same time, consumers may purchase anything that can legally be sold as long as they are able to pay for it.
  • In the long run, if consumers don’t buy a product, the producer must change it, replace it, or go out of business.

Discussion #2: Ask students to provide an example of a business that had to react when consumers did not purchase its product(s).

• Private property:
  • Anything of value that people own is considered private property.
  • Ownership of private property also includes ownership of the results of your work.
  • Individuals and businesses in a private enterprise economy are free to decide how to use their private property and when and how to sell it.
• Limited government control:
  • The private enterprise system that exists in the United States is not a pure private enterprise system because there is a limited amount of government control.
  • This private enterprise system is considered a mixed system.
  • Individuals and businesses are the primary economic decision makers, while government helps regulate and control the system.
  • In the United States, the government steps in only to protect citizens; otherwise, it lets them pursue their own goals.

Discussion #3: Ask students to provide examples of government control.

• Competition:
  • A rivalry between two or more businesses to attract scarce customer dollars
  • Therefore, a business must obtain and use resources efficiently.
  • This will help the company keep its prices competitive with those of other firms.
  • Other ways in which businesses compete for customers are by giving better credit options than those offered by rival companies, improving goods and services, creating new goods and services, and providing better service than their competitors.
• The profit motive:
  • The monetary reward business owners receive in return for taking the risk involved in starting a business
  • The desire to make a profit, called the profit motive, forms the economic basis for the private enterprise system.
  • Individuals and businesses in private enterprise can keep any profit they earn, or they can use it in any way they wish.
  • For this reason, many people consider making a profit the greatest motivating factor in the private enterprise system.
• The price-directed system:
  • A private enterprise economy is often called a price-directed system.
  • Price determines what consumers buy, which jobs they will take, the success/failure of businesses, and the products that will be produced.

Discussion #4: Ask students to share a decision they made that was completely directed by price.

Slide #17 Disadvantages of private enterprise

• Periods of unemployment
• Poverty
• Unequal distribution of wealth

Discussion #5: Ask students if they can think of any other disadvantages of private enterprise.

Slide #18 Economic freedoms in private enterprise

• The freedom to choose your economic goals and the type of work you do
• The freedom to make decisions about private property
• The freedom to compete

Slide #19 Limits to economic freedom

• Competition among buyers
• Personal choices
• Certain laws
• Taxes

Discussion #6: Ask students to provide more examples of limits to economic freedom that they experience.

Identify the Impact of Small Businesses / Entrepreneurship on Market Economies - Discussion Guide

** Alternative to this unit - use the EconEdLink online lesson entitled "I Don’t Want Much, I Just Want More" Follow the directions provided in the activity.

Slide# 22-23 Opening Discussion (Entry)

• Do you know anyone that works for or owns a small business?

• How would you define a small business? Number of employees?

Did you know that 99.7% of U.S. businesses are small businesses and 48.8% of U.S. employees work for small businesses?

• Clearly, the economy relies on small businesses and the entrepreneurs who start them.

• The impact of small businesses continues to increase.

• The opportunities to become an entrepreneur are growing.

KEY CONCEPTS

Slide #24 Small business and entrepreneurship

• A small business is defined as a business that employs 500 or fewer people.
• Entrepreneurship is starting and building a business.
• Entrepreneurs start businesses to support their passions and interests.
  • They typically offer unique, innovative products to their target market.
  • They are creative, take risks, have a vision for the future, and motivate others to work toward that vision.
  • They focus on rapid growth and productivity.
  • They look for ways to improve and learn from their mistakes, and they always work “on” their businesses rather than “in” them.
• Small-business owners have different priorities than entrepreneurs.
  • Rather than striving to offer unique products, they provide known, established products and services.
  • They focus on running stable, secure businesses that generate income over time.
  • They typically work “in” rather than “on” their businesses and are generally content to keep their business operations small and grow slowly.

Discussion #1: Ask students to provide examples of both small businesses and entrepreneurs.

Slide #25 Barriers to small business/entrepreneurial success

• Small business and entrepreneurial ventures suffer from a high startup failure rate.
• Around 50% of all startups fail within the first five years.
• Factors contributing to new business failures include:
  • Poor management
  • Poor planning
  • Insufficient capital
  • Dismal sales
  • Overexpansion
  • Lack of experience

Discussion #2: Ask students if they know of any new businesses that failed, and if so, why they failed.

Slide #26 Factors leading to growth of small businesses and entrepreneurship

• Technological advancements and the Internet have made starting a business much more accessible for would-be entrepreneurs
• An increase in resources and support systems has also helped small businesses thrive.
• They help entrepreneurs decide what types of businesses to start, find financing, and develop their business plans.
• These resources and support systems include:
  • Books
  • Magazines
  • Websites
  • Specialized government agencies
  • Small-business development centers
  • Private foundations devoted to entrepreneurship
• Multiple options for obtaining financing for a business startup have also led to an increase of small business and entrepreneurship.
• Sources of financing include banks, family, friends, grants, loans, government agencies, professional associations, corporate sponsors, angel investors, and scholarships.
• Many U.S. legislative reforms have created opportunities by providing small businesses with tax breaks.

Discussion #3: Ask students how they would seek funding for their new business ideas.

Slide #27 How do entrepreneurship and small business contribute to society?

• New job opportunities
• Economic growth
• Creation of social change and innovation
• Tax revenue
• Community involvement and charitable contributions
• Helping us save money and solve problems in our everyday lives

Discussion #4: Ask students if they can think of any other ways that entrepreneurship and small business contribute to society.

Factors Affecting a Business’s Profits—Discussion Guide

Slide# 30-31 Opening Discussion (Entry)

• How do businesses calculate profit?

• What types of business expenses would decrease potential profit?

Have you ever trained for an athletic competition, studied hard for a test, or learned to play an instrument?

• If you have, you’ve put your time and effort into something—so that you could get the reward: placing well at the competition, getting a good grade on the test, or performing well in the music recital.

• To get the reward, you had to give up something—your time, your energy, or even some of your money.

• So, before you decided to go for it, you considered whether the reward would be enough.

• You thought about what you’d gain compared to what you’d give.

• You asked, “Is it worth it?”

• If you answered “yes,” you were expecting a profit—whether you realized it or not.

KEY CONCEPTS

Slide #32 What is profit?

• The reward for taking the risk of investing in a business

• What's left over after expenses have been subtracted from sales income

• Two types of profit:

  • Gross profit (money left over after the cost-of-goods expense is subtracted from the total income)

  • Net profit (money left over after the cost-of-goods expense and the operating expense are each subtracted from the total income)

Discussion #1: Ask students to give examples of times they have earned a profit from something they did.

Slide #33 Benefits of profit

• Making a profit provides both motivation and satisfaction for businesses.

• In general, profit meets consumers' needs, provides employment opportunities, and strengthens the economy.

• Without profit, businesses could not last very long.

Discussion #2: Ask students to provide further benefits of profit.

Slide #34 How to increase profit

• To understand how to increase profit, you need to examine both the external and internal factors that influence it.

• While external factors include the economy, demand, and chance, internal factors include expenses and pricing.

• Whether external or internal, these influences are not all beyond a business owner's control.

• By decreasing expenses and increasing sales, an owner can increase the chances of receiving increased profit—and increased satisfaction, as well.

Discussion #3: Ask students if they can think of any other external and/or internal factors that might affect profit.

Slide #35 Ways to decrease expenses

• Eliminate some free services.

• Get the best rates on supplier purchases.

• Get the best rates on advertising.

• Increase worker efficiency.

• Avoid extra payroll expenses.

• Use resources wisely.

Discussion #4: Ask students to share a time they were able to decrease expenses in their own personal lives.

Slide #36 Ways to increase sales

• Change what you provide.

• Beat the competition.

Discussion #5: Ask students to provide more examples of ways to increase sales.

Factors Affecting Business Risk—Discussion Guide

Slide# 39-40 Opening Discussion (Entry)

• All businesses assume levels of risk.

  • What types of things would be potentially risky for a business?

You might not think of yourself as a daredevil, but you face risk every single day!

• You could fall and twist your ankle as you hurry downstairs in the morning.

• Your car could break down on the way to school.

• At lunch, you could buy a stale sandwich.

• Before you leave, you could lose your car keys somewhere in your locker.

• If any of these things happened, you’d be frustrated.

• So you try to keep bad things from happening—or you try to protect yourself against them.

• Businesses do the same thing—just like you, they don’t want to lose out!

• Read on to learn what business risk is and how businesses handle it.

KEY CONCEPTS

Slide #41 What is business risk?

• The possibility of loss (failure) or gain (success) inherent in conducting business
• A regular part of doing business

Slide #42 Classifications of business risk

• Classifications of business risk include:
• Hazard: Potential events or situations that can cause injury or harm to people, property, or the environment
• Operational: Possible events and situations that can result from employee actions, core processes, and daily business activities
• Strategic: Can have significant impact on the company's long-term plans and concern the overall business environment
• Financial: Possible events or situations that directly influence cash flow

Discussion #1-4: Ask students to provide examples of each type of risk.

Slide #43 Pure vs. speculative risk

• All business risks are either pure or speculative.
• Pure risks mean that there are two possibilities—loss or no loss.
• There is no possibility for gain.
• Pure risks are insurable.
• Speculative risks have the possibility of loss, no change, or gain.
• They are not insurable.

Slide #44 How businesses respond to risk

• Businesses take risks only when they feel that the risks are worth it.
• To handle risks, businesses choose to avoid, prevent/control, transfer, or retain them.
• Avoiding is choosing not to encounter the risk.
• Preventing/Controlling is taking measures to reduce a risk and its impact.
• Transferring risk is reducing or eliminating the risk by transferring it to another person or business.
• Retaining is doing nothing to reduce or eliminate a risk.

Discussion #5: Ask students to share situations in which they think each type of risk response would be appropriate.

Competition—Discussion Guide

Performance Indicator: Explain the concept of competition

Slide#47-48 Opening Discussion (Entry)

• Let's chat about competition:

  • List as many businesses as you can think of that would be considered McDonald's Direct Competition. Indirect?

Competition exists all around us—on the job, at school, in sports, even in dating.

• Individuals compete for promotions, for the best grades, for starting positions on the football team, and even for the attention of a certain special someone.

• In most, if not all, of these cases, competition is a good thing.

• It brings out the best in people.

• It helps individuals excel and makes the workplace more efficient, the school better performing, the team higher scoring, and the social scene more exciting.

• Life would be pretty boring without competition, don’t you think?

• So what about competition in business?

• Is it a good thing there, too?

• It sure is!

• In fact, it’s what turns the wheels of our private enterprise economy.

• When businesses compete successfully, they grow and prosper, and when they don’t compete, they often fail.

• But what is competition exactly, against whom do businesses compete, and how do they compete against their rivals?

KEY CONCEPTS

Slide #49 What is competition?

• A rivalry among two or more businesses to attract scarce customer dollars
• Businesses compete either directly or indirectly.
• Direct competition occurs between or among businesses that offer similar types of goods or services.
• Indirect competition occurs when businesses compete for scarce customer dollars that might be spent on goods or services different from their own.

Discussion #1: Ask students to provide examples of both direct and indirect competition.

Slide #50 Types of competition

• Businesses generally use price or non-price competition.
• Price competition is a type of rivalry between or among businesses that focuses on the use of price to attract scarce customer dollars.
• Forms include discount coupons, special sales, price matching, and rebates.
• Non-price competition occurs when businesses compete on a basis other than price to attract scarce customer dollars.
  • Exceptional quality
  • Special features
  • Trained personnel
  • Outstanding customer service
  • Convenience
  • Modern facilities
  • A wide variety of products

Discussion #2: Ask students to think of more examples of price competition.

Discussion #3: Ask students to share a time that they chose one business over another because of reasons not relate to price.

Slide #51 Market structures

• Competition depends on the market structure: the type of market, or environment, in which businesses operate, and it is primarily based on the number of sellers in the market.
• There are four types of market structures:
  • Perfect competition: Many businesses must sell identical products to many buyers.
  • Monopolistic competition: A lot of businesses sell similar products that have only a few differences.
  • Oligopoly: Only a few businesses sell all of the products.
  • Monopoly: The market is controlled by one business, and there are no substitute products readily available (no competition).

Discussion #4: Ask students to provide some advantages and disadvantages of each market structure.

Slide #52 The role of government

• In a private enterprise system, governments regulate businesses to encourage ethical and legal competition.
• The U.S. government has passed several pieces of legislation to promote competition.
  • Sherman Antitrust Act
  • Clayton Act
  • Federal Trade Commission Act
  • Robinson-Patman Act
  • Celler-Kefauver Antimerger Act