Unit 5 Foundations of Economics What's Ahead in Unit 5

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Foundations of Economics

What's Ahead in Unit 5

In Unit 5 you will learn about economic systems. You will learn how the American economic system works and how it is a basic part of our free society. You will also learn about the role you play in our economy.


What Is an Economy?


Basics of Our Economic System


Our Economy and You


Why Study Civics?

What is an economic system? How does our economy work? What role will you play in the economy? How will understanding the economy hell you plan for the future? These are all questions that can be addressed by the study of civics.

Standards for Civics and Government


The following National Standards are covered in this unit.

II. What are the foundations of the American political system?

B. What are the distinctive characteristics of American society?

C. What is American political culture?

D. What values and principles are basic to American constitutional democracy?

V. What are the roles of the citizen in American democracy?



What Is an Economy?

What's Ahead in Chapter 13

In this chapter you will read about economic wants, resources, and the decisions that must be made about using resources to satisfy wants. You will also find out about three different kinds of economic systems through which societies make these decisions.


Why Societies Have Economies


Basic Economic Decisions


Three Types of Economies


Sequence Understanding the sequence, or order, of events will help you remember how these events are related. As you read this chapter, you will use the skills of recognizing words that signal sequence and putting events in chronological order.


National Standards for Civics and Government

The following National Standards for Civics and Government are covered in this chapter:

II. What are the foundations of the American political system?

B. What are the distinctive characteristics of American government?

D. What values and principles are basic to American constitutional democracy?

Civics in the Real World

"Guess what, Mike?" Josh exclaimed. "I got a job working at Rick's Bikes after school and on the weekends. I'll have money for movies and clothes, and I can start saving for a new computer."

Mike grinned. "That's great. I knew Rick would hire you. Let's go—hey, wait a second." He frowned. "If you take an after-school job, can you stay on the soccer team?"

Josh's face fell. "I didn't think of that," he said. "I'd have to miss practice three times a week. And the games are all on Saturdays:'

Josh has a problem. He wants to take a part-time job, but it means he'll have to give up his place on the soccer team. He has a tough decision to make.

Like Josh, societies have to balance their wants against their resources. To achieve this balance, they must make decisions. The system by which people in a society make decisions about how to use their resources to produce goods and services is called an economy.

Citizen's Journal Do you think Josh should stay on the team, or should he give up soccer to take the job at Rick's Bikes? Which is more important—playing on the team or earning money? Explain your opinion in your journal.



Why Societies Have Economies

Reading Preview


In this section you will

• Describe the characteristics of people's many wants and how resources satisfy wants.

• Explain the steps of production to consumption.

• Determine how choices are made to satisfy wants.

• Discuss how scarcity affects economic choices.

Taking Notes

Make a diagram like the one below. As you read this section, complete the diagram with information about the main parts of an economy.

Key Terms

factors of production



opportunity cost


Main Idea

In an economic system, scarce resources are used to produce and distribute goods and services that satisfy people's needs and wants.

Target Reading Skill

Recognize Words That Signal Sequence Signal words—such as at this time, soon after, and before— point out relationships between ideas or events. As you read, look for signal words and phrases that help you understand the sequence of events.

When we shop for food, we are fulfilling a basic want.

In reading about Josh on page 349, you came across the basic economic facts of life: In any society, people must make choices about how to use their resources to produce goods and services to satisfy their wants. Notice that there are several elements to think about when looking at these economic facts—wants, resources, production of goods and services, and choices. By looking at how each of these elements is related to the others, you will gain a clearer understanding of what an economy is and why every society has one.

People's Many Wants

Everyone has wants. Our most basic wants are for food, clothing, and shelter. However, people are rarely satisfied to have just their basic wants met. People also want to he entertained, to be educated, and to have health care when they are sick. In fact, people have an almost endless number of wants.

Of course, your wants will differ from those of other people, depending on where you live and who you are. One important influence on your wants is your environment. If you live in Alaska, you will want to have warm clothes to wear and good heating for your house. In the hot weather of Phoenix, Arizona, your wants, of course, will be different.


Wants are also influenced by the societies in which we live and their cultures. Americans usually want to live in houses or apartments. For certain people in Mongolia, tents best fit their nomadic way of life.

Even when they live in the same environment and the same culture, different people want different things. Some people choose a vacation in the mountains, while others choose to go to the beach. You may favor white basketball shoes, while your best friend wants black ones.

People's wants can also change. Think of the toys you wanted when you were younger. How do they compare with the goods you want to have now?

Another important characteristic of wants is that many of them can be satisfied only for a short time. Do the jeans you wore last year still fit you, or do you need to buy a new pair? Understanding that many wants occur again and again is basic to learning what an economy is.

Reading Check List some of the factors that affect people's wants.

Using Resources

Factors of production are the resources people have for producing goods and services to satisfy their wants. According to economists—the people who study how economies work—the three basic factors of production in an economy are labor, land, and capital.

Labor One factor of production, labor, includes time and energy. If Josh takes the job at Rick's Bikes, he will be using his time and energy to help sell bicycles. His labor will also include the knowledge and skills he uses in his job.

Satisfying Our Wants People's wants are often shaped by where they live. Contrast How do you think people's wants in the environments in both photos might differ? Why?


Civics and Economics

Agriculture Farming is basic to the United States economy. Most of the early colonists were farmers, so farming has a long and important history in the United States.

The vast areas of the midwestern plains allow the nation to grow far more food than Americans need. In 2003, American farmers grew more than 40 percent of the world's corn, 33% of its soybeans, and 12% of its wheat. The United States is the world's leading agricultural exporter. More than $56 billion of agricultural products are exported yearly. Chief importers of American agricultural products are Canada, Japan, Mexico, and the European Union.

Analyzing Economics

Why do you think the nations and regions listed import agricultural products from the United States?

From the Field to the Table A great deal of time, effort, and money go into the processes of production, distribution, and consumption as these photos show.

Analyze Information The second photo shows pasta being made in a factory. Which process does this step illustrate—production, distribution, or consumption?

Land Another factor of production, land, is made up of the many natural resources that are needed to help produce goods and services. Such resources include soil, minerals, water, timber, fish and wildlife, and energy sources.

Capital Finally, there is the factor of production called capital. Capital is anything produced in an economy that is used to produce other goods and services.

Capital includes any tools, machines, or buildings used to produce goods and services. When goods such as tools and factories are used as capital, they are called capital goods. For example, tools for fixing bicycles and a computer for keeping track of sales are capital goods to the owner of Rick's Bikes.

Although it is not a factor of production, money is sometimes referred to as financial capital. Financial capital is money that is available for investing or spending.

Reading Check How does land affect a society's economy?

Production to Consumption

To produce the goods and services people want, the resources of labor, land, and capital must be combined in a process called production. That is why these resources are called factors of production. Farmers produce food by combining soil, water, and sunlight (land) with seeds and machinery (capital). They also use their knowledge, skills, time, and energy, as well as that of their workers (labor).


Production is followed by distribution, the process by which goods and services are made available to the people who want them. The truck that delivers bread to your market is part of the distribution process.

Finally, when goods and services have been produced and distributed, they are ready for consumption. Consumption is the act of buying goods and services.

Satisfying people's economic wants can be a very complex process. In our economy, millions of people work in hundreds of thousands of businesses that produce and distribute many different goods and services.

The steps in the process of satisfying wants are like links in a chain of activities. As you read the following description, look at the diagram of the want-satisfaction chain on pages 354-355.

Wants The process begins with a want. Suppose, for example, that you and some of your friends decide to get together one evening for a spaghetti dinner. Among the supplies that you will want to buy and cook is the pasta. The first link in this want-satisfaction chain, then, is your want for pasta.

Production The next link is made up of people who combine the resources of land, labor, and capital. In the case of pasta, farmers use soil, water, seeds, farm machinery, and labor to produce wheat, which they sell to a grain-milling company. The company combines labor and machinery to turn the wheat into flour, which it sells to a pasta maker. The pasta maker adds other ingredients, like salt and water, and uses labor and machines to mix, roll, and cut the dough. This production process results in the pasta that you and your friends want.

Target Reading Skill

Recognize Words That Signal Sequence Reread the first four paragraphs on the page. Then, identify the signal words that help you understand the sequence f events being described.


Distribution However, your want is not yet satisfied. Once the pasta is made, it is sold to a grocery wholesaler who then sells and delivers it to a grocery store. This is the distribution link in the chain.

Consumption After the pasta has been distributed, you and your friends buy, cook, and eat it—the consumption link in the chain. At this point, you have achieved want satisfaction. However, your want may be satisfied only for the time being. If you decide you want to eat pasta another time, the chain will have to repeat itself. The want- satisfaction chain is arranged in a circle to show that the process of satisfying wants happens over and over again.

Reading Check How does production lead to distribution? How does distribution lead to consumption?

Analyze Diagrams

The Want-Satisfaction Chain

The satisfaction of human wants can involve many steps. This want-satisfaction chain details the steps involved in satisfying the want for clothing.

a. In this want-satisfaction chain, what occurs in the "Production" step?

b. After goods are produced, what must occur before the goods are available for consumption?

1. Human wants

2. require people to combine resources of land, labor, and capital

3. in the process of production


4. which results in goods and services

5. which go through distribution

6. to make goods available for consumption

7. which results in want satisfaction.

Making Choices

There are never enough resources to produce all the goods and services people want. As a result, people in all societies must make choices about which of their wants will be satisfied and which will not. These choices are economic choices. The process of making them is what an economy is all about.

Benefits One part of making an economic decision is looking at the benefits you will receive from each of your possible choices. Josh's benefits from the bike-store job will include $150 a week. He will also gain work experience and the satisfaction of having money of his own.


Costs A second part involves looking at the costs of your choices. The major cost of any decision is giving up the benefits you would have received from the alternative. If Josh takes the job, for example, he will give up the benefits he would have received from using his time to play soccer.

Like Josh's decision, every economic decision has an opportunity cost, the highest valued benefit given up when a choice is made. If Josh decides that the opportunity cost of taking the job would be greater than its benefits, then he should turn down the offer from Rick's Bikes.

Reading Check What factors must people balance when they want two things that are in conflict?


Societies always face problems like Josh's. This problem is known as scarcity, which means that resources are always limited compared with the number and variety of wants people have. Scarcity is a problem in both rich societies and poor ones. The idea of scarcity is not based on the total amount of resources in a society. It is based on the relationship between wants and the resources available to satisfy them.

The following example may help you understand scarcity. Japan does not have enough good farmland to grow all the food its people want. The United States has plenty of good farmland. However, some of the land that could be used to grow food is also in demand for factories, houses, and shopping malls. You can see that in both Japan and the United States, land resources are scarce compared with the ways people want to use them.

limited Resources

Japan (left) is a small island nation with a very large population. There is very little land available for farming. The United States (right), however, has more land available for farming.

Draw Conclusions How do you think the scarcity of farmland in Japan affects the prices that consumers in Japan pay for such things as produce?


Each decision to use resources to produce one kind of good or service is, at the same time, a decision not to use the same resources to produce something else that people want. The farmer who grows wheat chooses to use the limited resources of land, labor, and capital to grow wheat instead of some other crop such as corn, oats, or barley.

In a large economy, such choices are made by businesses as well as by individuals. For example, a clothing company that makes jackets and coats has a certain number of factories and workers. This company must make important decisions about how best to use these resources when making it products.

Governments also have to make choices. For example, how much of the federal government's resources should be used to build defense systems and how much to improve the schools? How much should be used to protect the environment and how much for the elderly?

Although the choices that individuals, businesses, and governments must make are different in many ways, they all have one thing in common. They involve making economic decisions about how to use resources to produce goods and services to satisfy wants.

Reading Check Why do both rich and poor nations face the problem of scarcity?

A company that makes car has a limited number of factories, machines, and workers. That company will have to make choices about how many cars of each model they produce.

Section 1 Assessment

Key Terms

Use each of the key terms in a sentence that explains its meaning: factors of production, capital, consumption, opportunity cost, scarcity

Target Reading Skill

1. Recognize Words that Signal Sequence List words that helped you understand sequence in the Production to Consumption section of the text.

Comprehension and Critical Thinking


a. Recall Describe some typical needs and wants.

b. Categorize Which wants are influenced by friends and social status?


a. Recall What are the three factors of economic production? b. Determine Relevance Identify the factors of production at a local bakery.


a. Describe What steps must take place before you buy a box of pasta?

b. Determine Relevance Choose an object that you want, such as a CD. Describe the steps that are part of the want-satisfaction chain.


a. Describe What are the factors that affect an economic decision?

b. Identify Alternatives How might Josh satisfy both his wants?


a. Explain How does the concept of scarcity apply to Josh's situation?

b. Draw Conclusions What is the result of economic scarcity in a society?

Writing Activity

Suppose that you have to choose between buying a new jacket a d saving your money to buy a use car when you get your license. List the economic factors that will affect your decision. Then, make the decision and explain your choice.

TIP Before you begin writing, make a list showing the benefits and costs of each option.


Section 2

Basic Economic Decisions

Reading Preview


In this section you will

• Understand that determining what and how much to produce is a basic economic choice.

• Explain why deciding how to produce goods and services is a second basic economic question.

• Understand that deciding who will get goods and services is a third basic economic decision.

Taking Notes

Make a diagram like the one below. As you read this section, complete the diagram with information about the three basic economic decisions.

Key Terms



Main Idea

Basic economic decisions include what and how much to produce, how to produce it, and who will have the opportunity to consume it.

Target Reading Skill

Understand Sequence Remember that events follow one another in a cause-and-effect relationship. As you read this section of Chapter 13, look for the causes and effects that indicate a sequence of events.

If this pizzeria is to succeed, the owner must make good decisions about what kinds and amounts of pizza to make.

Have you ever thought that a pizza is the result of economic decisions? A restaurant owner makes a choice to open a pizza business. The owner must decide how many pizzas to make in a day. He or she must also decide how many pizza ovens and other equipment to buy and how many people to hire to make the pizza and serve it to customers.

Like the owner of the pizza restaurant, people in any economy face major economic decisions. The three most basic decisions are

• Which goods and services should be produced, and in what amounts?

• How should these goods and services be produced?

• Who will get the goods and services that are produced?

From the smallest neighborhood pizza parlor to the largest corporate boardroom, these decisions are being made every day in every part of the economy.


What and How Much?

In any economy, people must decide what to produce with the scarce resources they have. In our economy, the people who own or can get resources make this first major economic decision.

A farmer who owns land and machinery may decide to produce wheat instead of barley. You might decide to use a resource you own your labor to mow lawns instead of selling bicycles. Any decision about which goods or services to produce is based on a prediction of what people will want to consume.

As an owner of resources decides what to produce, he or she also decides the quantity, or amount, to produce. The amount of a good or a service that is produced will depend on a number of factors. For instance, farmers' decisions will be based on the amount of land they own or can rent, the amount of labor and machinery they can afford, and the amount of wheat or barley they think they can sell.

Reading Check Who in our society decides what to produce?

How to Produce Goods and Services

The second major economic decision is how to produce goods and services. In other words, in what way will land, labor, and capital be combined to produce goods and services?

Choices to Make Farmers who produce wheat must make several choices about how to do it. Should they plant all of their land with wheat, or should they introduce some additional crops? Should they grow their crops using organic methods, or should they use conventional fertilizers and pesticides? Should they do all the work themselves, or should they hire workers to plant and care for the wheat? Should they rely more on workers or on machinery? Should they buy the farm machinery they use, or should they rent it? Should they manage the farm business themselves, or should they hire managers to oversee the work? In making decisions about how to produce, people usually want to choose the combination of resources that will be the least costly.

Companies that sell food products rely on "taste tests" in order to help them make important economic decision about what kinds of product to make.

Citizen Profiles

Michael Dell Computers have always fascinated Michael Dell. While he was still in college, he realized that if he sold computers directly to customers, there would be no distributors and no retail stores involved in the sale. This meant that Dell could charge his customers less for a custom-made computer. He began selling his computers from his dorm room in college. Today, the Dell Computer Corporation employs thousands of people and is worth billions of dollars.


What economic choices did Dell make?


Technology and Production In the early 1900s, Henry Ford developed the moving assembly line to speed up production (left). Today, robots and other technology (right) have speeded up the production process.

Identify Cause and Effect What are some of the effects that technology has had on workers?

Target Reading Skill

Understand Sequence Read the first sentence under the heading The Role of Technology at the top of the page. Note the cause and effect relationship indicated by the phrase has led to." What other words in this section indicate cause and effect?


The Role of Technology In our economy, the desire to find the least costly way to produce goods and services has led to the growth of technology, or the practical application of science to commerce or industry. In the early 1800s, cloth makers began using power looms. Although the new looms cost a lot of money, they could produce cloth much faster than the old handlooms could. Therefore, the cost of producing cloth soon dropped.

Since those early beginnings, technology has played an increasingly important part in decisions that people make about how to produce goods and provide services. For example, researchers have developed seeds that produce larger crops. Advances in electronics have given us robots used in factories. Computers keep records, make calculations, and speed up many jobs. The Internet allows businesses to sell products and services to a wide audience online.

Reading Check What is the relationship between production and technology?

Who Gets What?

Deciding who will get the goods and services that are produced is the third basic choice that must be made in an economy. In other words, people must find a way to decide how all the goods and services will be divided up. Wants are always greater than the resources available to satisfy them. Therefore, this choice is an important one and is sometimes very difficult.

Choices to Make Should goods and services be divided equally among all people? Should people receive goods and services on the basis of what they say they want? Should a small group of people decide who is to receive which goods and services? Or should people who own more resources and produce more products get more goods and services than people who own and produce less?


The Role of Goals and Values Different societies have solved this problem in different ways, depending on their goals and values. A society that wants to achieve equality among its people might develop a system for sharing its products equally among its citizens, even if it means that some people work harder than others for the same reward.

On the other hand, a society in which freedom is the highest value might solve the problem differently. It might let citizens compete freely among themselves to try to get the goods and services they want, even if it means that some people get more than they need while others get less.

The goals and values of a society have a great influence on how that society makes all three basic economic decisions. In the next section, you will read about three different economic systems—traditional economies, command economies, and market economies. Societies have developed these three different systems for organizing their resources to produce and distribute the goods and services people want.

Reading Check What do a society's values have to do with its economy?

Early settlers in Jamestown, Virginia, had to make the same basic economic decision that we do today. However, their decisions reflected the needs and wants of their society, which was very different than our modern society.

Section 2 Assessment

Key Terms

Use each key term in a sentence that explains its meaning: quantity, technology

Target Reading Skill

1. Understand Sequence Explain the sequence of events that led to Michael Dell's success.

Comprehension and Critical Thinking


a. Explain Suppose that you have just bought 100 acres of land. What is the first economic question you should ask yourself?

b. Draw Conclusions On what factors does the number of sweaters a factory owner produces depend?


a. Describe What choices must a smoothie stand owner make in determining how to produce smoothies?

b. Identify Main Ideas How might new technology affect a wheat farmer's decisions?


a. Recall How do people decide who will get what their economy produces?

b. Predict You will read about three different economic systems in the next section. Use the information in this section to predict their characteristics.

Writing Activity

Read the questions under Choice to Make on page 360. Write an essay in which you answer these questions. Explain the reasons behind your answers.

TIP Look at the U.S. economy as you answer the questions. How does the United States divide good and service among its citizens? Do you think this division of goods and services is fair? If not, how would you change it?


Citizenship Skills

How to Analyze an Editorial

Editorials are newspaper articles that express a point of view. The writer of an editorial chooses a position on an important issue and makes an argument to support that point of view. Editorials express opinions based on facts.

Read the editorial below. Think about the writer's opinion and the argument he or she has given. Does the editorial influence your opinion about the prevention of reckless driving among teenagers?

A Reckless Law

Our state senators should steer clear of the ill-conceived bill now before them, which would revoke the driver's license of any teenager found guilty of reckless driving.

Many community groups have campaigned for increasing the penalties for driving recklessly. We have applauded their efforts to encourage safe driving among teens. However, the "reckless law" proposed by Senator Bellitt is not the most effective way to put an end to reckless driving.

Reckless drivers of all ages face severe consequences in our state. Even a first offense for reckless driving carries a stiff fine and often results in 10 license penalty points. (It takes only 15 points to lose one's license).

Not only is the Bellitt bill reckless itself, but it would discriminate against drivers aged 16-19. Why should a reckless driver who is one week short of his twentieth birthday be treated differently from all other adults? We already have punishments in place for reckless driving; perhaps now we should concentrate on preventing it in the first place.

Learn the Skill

To analyze an editorial, follow these steps:

1. Identify the writer's opinion. Identify the issue that the writer presents.

2. Locate the evidence. Look for facts the writer uses to support his or her point of view.

3. Think about the writer's argument. Is there enough evidence to support the argument? Do you agree or disagree?

Practice the Skill

1. Read the editorial above. Write down the writer's opinion.

2. Write down the facts the writer has given to support his or her opinion.

3. Decide whether you agree with the writer's opinion. Discuss your response to the editorial with a classmate.

Apply the Skill

1. Collect editorials from newspapers.

2. Choose one that deals with an issue that is important to you.

3. Read the editorial carefully. Has your opinion about the issue changed? Has it become stronger?



Three Types of Economies

Reading Preview


In this section you will

• Identify and discuss traditional economies.

• Identify and discuss command economies.

• Identify and discuss market economies.

• Discuss modern-day economics in China and the United States.

Key Terms

traditional economy

command economy

market economy



free enterprise


mixed economy

Main Idea

Various types of economic systems include traditional economies, command economies, and market economies.

Target Reading Skill

Recognize Words That Signal Sequence Signal words point out relationships between ideas or events. As you read this section, look for words that signal sequence.

Taking Notes

Make a diagram like the one below. As you read this section, complete the diagram to compare and contrast command and market economies

Most people do one kind of work. With the money they earn, they buy goods and services produced by other workers.

People do not make economic decisions all by themselves. Almost every economic task, from raising wheat to providing hospital services, requires that people work together. Also, people can rarely meet all their economic needs by themselves. Most people do one kind of work. They depend on the work of other people for most of the products and services that they use.

In human history, there have generally been three basic types of economic systems: traditional economies, command economies, and market economies. These systems are three different ways a society can organize production, distribution, and consumption to solve the economic problem of scarcity.

Traditional Economies

In a traditional economy, the basic economic decisions are made according to long-established patterns of behavior that are unlikely to change. These customs are passed along from elders to youths. The family is the basic unit of the traditional economy. However, in societies with traditional economies, all members work together to support the society rather than just their families.

For example, a tribe of hunters may follow certain customs. They will make camp at the same places and hunt the same game year after year. The roles that fathers, mothers, daughters, and sons play as they help each other in the hunt remain the same over the years.


What to Produce Tradition answers the question of what and how much to produce. The people who belong to the tribe want to "produce" game. They want enough of it to feed the whole tribe.

How to Produce There are also customs that have to do with how to "produce" the game. Year after year, the tribe members use the same weapons and methods to hunt the game. They use the same methods to prepare and cook it.

Who Gets What Is Produced The tribe's customs also determine who gets what is produced. When sharing the kill, each member might get an amount based on his or her role in the hunt. In another tribe, shares might be divided according to the number of members in a family.

Who Owns the Resources People in a traditional economy usually own their own resources, such as land, tools, and labor. They have some freedom to make their own day-to-day decisions about when and how to use their resources. They may decide, for example, not to hunt one day, but to gather fruit instead. They have little freedom, however, when it comes to making the basic economic decisions already set by tradition. As a result, there is very little change in the economy over time.

Societies with traditional economies are usually small. This way, fewer resources are needed and fewer goods need to be produced. Otherwise, the economy would not be able to support too large a society.

Today, few purely traditional economies remain in the world. A few societies in parts of Central and South America, Africa, and Asia still have economies that are mostly traditional.

Reading Check What is the role of custom in a traditional economy?

These hunters are part of the San tribe of Kalahari Desert in Africa. In this traditional economy, they produce only what members of the tribe need.


Analyzing Political Cartoons

Every economic system is subject to ups and downs. When a society's economy suffers, the government may attempt to help stimulate economic growth.

1. What do you think the girl is requesting of her father? Explain your answer.

2. How does the cartoonist use humor in this cartoon?

"I need some short-term economic stimulus."

Command Economies

In a command economy, the government or a central authority owns or controls the factors of production and makes the basic economic decisions. In such a system, the government usually has charge of important parts of the economy, such as transportation, communication, banking, and manufacturing. Farms and many stores are government-controlled. The government may also set wages and decide who will work at which jobs. The government, not private individuals, makes the major economic decisions.

Economic systems based on command principles have existed for thousands of years. From Egyptian pharaohs and medieval lords to communist nations such as the Soviet Union during the twentieth century, powerful rulers and governments have controlled the economies of their societies.

Government Decision Making In a command economy, a central planning group makes most of the decisions about how, what, and how much to produce. It is up to the central planning group to make sure that there are enough resources and workers to produce what is needed. The result is that only those products that the government chooses will be available for people to consume. In this type of economy, consumers have little or no power in determining what and how much gets produced.

Target Reading Skill

Recognize Words That Signal Sequence The word result shows a sequence: first, a decision is made; then, as a result, product become available. As you read, look for more word. that signal the order in which events take place.


Who Gets What In a command system, the decision of who gets what is produced depends on the goals and values of the central authority. A greedy dictator, for example, might choose to make himself and his friends rich. On the other hand, if the government's goal were to satisfy wants based on individual need, then each person might get food, clothes, and housing regardless of how much or how link he or she produced.

Reading Check How much individual freedom exists in a command economy?

Market Economies

The third kind of economic system is the market economy, a system in which private individuals own the factors of production and are free to make their own choices about production, distribution, and consumption. The economy of the United States is based on the market system.

In a market economy, all economic decisions are made through a kind of bargaining process that takes place in markets. A market is a place or situation in which buyers and sellers agree to exchange goods and services. A local farmers' market, a sporting goods store, the New York Stock Exchange, and even the sign you posted in the neighborhood sandwich shop are all examples of markets.

In a market, the value of what you have to offer sets the value of what you can get. Therefore, no one person or group runs a market economy. Instead, everyone takes part in running it by freely making economic decisions.

Making Economic Decisions

In a market economy, the wants of individuals like this American shopper play a major role in determining what will be produced.

Synthesize Information What details in the photo indicate that the woman is a consumer in a market economy?

Decision Making by Individuals In a market economy, people are free to decide how to use land, labor, and capital. They are also free to start their own businesses and to choose what jobs they want to do. The major economic decisions about what and how much to produce and how to produce it are made by individuals, not by a central government's command or by tradition and custom.

In a market economy, people who earn high wages for the work they do will be able to buy more goods and services than can people who earn lower wages. People who own land and capital will also be able to afford more goods and services than will people who do not.

Competition Competition plays an important part in a market economy. Producers compete to satisfy the wants of consumers. Workers compete for jobs. These individuals are all part of the process of making decisions in a market economy.

Analyze Diagrams

The Factors of Production


All of the natural resources that are used to produce goods and services


Any effort that a person devotes to a task for which that person is paid


Any human-made resources that are used to create other goods and services


A person who assembles the factors of production to create new goods and services

Goods and Services

An entrepreneur brings land, labor, and capital together to create goods and offer services.

Analyze Give specific examples of land, labor, and capital involved in producing a jacket.

Profit Seeking An incentive is the hope of reward that encourages a person to behave in a certain way. One of the chief incentives for people in a market economy is the potential to make a profit. Profit is the difference between the total cost of production and the total revenues received from buyers. In a market economy, people base their decisions about what and how much to produce largely on how much profit they think they will make.

The desire to make a profit also leads people to invest in a business. To invest means to use your money to help a business get started or grow, with the hope that the business will earn a profit in which you can share.

Free Enterprise and Capitalism There are two other names for the market economy. One of these is free enterprise. The term free enterprise refers to the system in which individuals in a market economy are free to undertake economic activities with little or no control by the government.

The other name for the market system is capitalism. Capitalism is a system in which people make their own decisions about how to save resources as capital and how to use their capital to produce goods and provide services. The term capitalism calls attention to the fact that, in a market economy, capital is privately owned.

Reading Check What role does competition play in a market economy?


Students Make a Difference

Michael Arriaga, a sophomore at Los Fresnos High School in Los Fresnos, Texas, believes that volunteer services can help small communities meet the needs of their citizens.

As a member of his school's chapter of Family Career Community Leaders of America, Michael has worked to make a difference in other people's lives. He also works annually for the Feast of Sharing, a project that provides warm meals to the poor and the homeless people in his community.

Students can help make a difference by assisting people in need.

Service Learning

How can you make a difference for the poor and the homeless people in your community?

Modern-Day Economies

Describing economic systems as traditional, command, or market is useful for understanding the way people in different societies make economic decisions. In today's world, however, most countries have a mixed economy, one that is a mixture of the three basic systems. The People's Republic of China and the United States are two very different examples of mixed economies.

The Economy of China Before the late 1980s, the economy of China was a command economy. The central, one-party government had charge of the major resources and made the important economic decisions. The government of China made economic plans in which it set goals for those goods, and how many of each, that would be produced during a certain period. These plans also set forth how the resources were used in production.

In the late 1980s and 1990s, the Chinese government took steps toward creating a more mixed economy by adding some features of free enterprise to its economic system. In China's cities today, privately owned shops sell consumer goods and new hotels and restaurants abound.


The Economy of the United States The United States economy is considered a market—or free-enterprise—system. Individuals and privately owned businesses own the factors of production. Business owners are free to compete with each other in the marketplace to produce and distribute any goods and services they think they can sell. Americans are also free to buy and consume any goods and services they want and can afford. The marketplace runs with very little government intervention.

However, there are elements of government control in our economy. As you have seen in earlier chapters, our government provides, or requires the economy to provide, certain services such as education, mail delivery, and an army and navy for defense. Government also provides such goods as highways and airports. Some citizens feel the government needs to be more involved in the economy. Others argue that the government should intervene less. In the following chapters, you will read about many other ways in which citizens have asked the government to help take charge of and guide the American economy and how the government has responded.

Reading Check How do the economies of China and the United States differ?

San Francisco's busy downtown shows the economic success of the American free-enterprise system.

Section 3 Assessment

Key Terms

Use each of the key terms in a sentence that explains its meaning: traditional economy, command economy, market economy, profit, invest, free enterprise, capitalism, mixed economy

Target Reading Skill

1. Recognize Words That Signal Sequence Reread the sections Competition and Profit Seeking. List signal words from these sections that indicate the sequence of events.

Comprehension and Critical Thinking


a. Describe Describe a traditional economic system.

b. Link Past and Present Why are there so few traditional economies in the world today?


a. Recall Who answers the three basic economic questions in a command economy?

b. Categorize What are some disadvantages of a command economy?


a. Explain What role do individuals play in a market economy?

b. Determine Relevance What elements of a market economy do you see in your town or city?


a. Explain What is a mixed economy?

b. Draw Inferences Why do most countries today have mixed economies?

Writing Activity

Both Russia and the Soviet Union once had centrally planned economies. Read more about these economies—past and present—online. Summarize what you ha e read in a well-organized essay that answers the question "Why did these economies change?"


Skills for Life

Synthesizing Information

When learning about a subject, you will often use information from many types of sources. Knowing how to synthesize, or put together, different pieces of information helps you draw conclusions. In the example below, a letter and a line graph describe the changes in attendance at a series of outdoor concerts held every year in the summertime.

Attendance at the Summer Concert Series

Excerpt from a letter to potential advertisers sent by the director of the Summer Concert Series: "A review of the Summer Concert Series shows great success. In our second year, we more than doubled attendance. Growth continued to a high of 15,000 people in 2002. The terrible weather during the summer of 2003 and the cancellation of two bands made that summer a disaster. But we recovered nicely in 2004. We are looking forward to continued growth in 2005."

Learn the Skill

Follow these steps to synthesize information:

1. Identify the sources. Knowing the publication and the date of a graph, an article, a letter, or some other text helps you evaluate information.

2. Identify key facts and ideas. What are the main points you need to know?

3. Analyze the evidence. Examine and compare the different types of evidence. Does the information in the text match the information in the graph?

4. Draw conclusions. What conclusions can you draw from the combined evidence?

Practice the Skill

Study the text and graph, and then answer these questions:

1. (a) Who wrote the letter? (b) What is the source of the information in the graph?

2. What is the main point of the letter? What facts are given to support it?

3. Describe what the data in the graph show about changes in attendance over the years.

4. What conclusion can you draw about the future of the Summer Concert Series?

Apply the Skill

Find an article in a newspaper or magazine that uses a graph or another form of illustration to further explain points made in the article. Describe how the two pieces of evidence work together.



Review and Assessment

Chapter Summary

Section 1

Why Societies Have Economies

(pages 350-357)

• People in a society have basic needs such as food, clothing, and shelter, and important wants, such as education and health care.

• A society combines its factors of production—labor, land, and capital—to produce the goods and services its citizens need and want.

• After goods are produced, they are distributed to people who want them. The purchase or use of these goods and services is called consumption.

• Because resources are limited, people must consider each option's opportunity costs and benefits as they decide which needs to satisfy.

• scarcity results when a resource valued by society is not available in quantities high enough to satisfy the need for it.

Section 2

Basic Economic Decisions

(pages 358-361)

• A society must decide which goods and services to produce and in what quantity.

• People must decide how to produce those goods and services. The desire to bring down the costs of production often leads to improved production technology.

• Society must decide how the goods and services will be distributed among the people.

Section 3

Three Types of Economies

(pages 363-369)

• In traditional economies, people produce and distribute goods and services in the same way their ancestors always have done.

• In command economies, the leaders decide which goods and services to produce and how those goods will be distributed.

In market economies, also known as free enterprise or capitalism, each individual decides what to produce, how to produce it, to whom to sell it, and how to invest the profits that result from the sale.

• Most modern economies are mixed economies that blend elements of traditional, command, and market economies.

Copy the chart below, and then use it to help you summarize the chapter.


Reviewing Key Terms

On a separate sheet of paper, write the term that completes each sentence correctly.

1. The money left over after expenses have been met is called (capital, profit).

2. The disadvantages of an economic choice can also be called the (factors of production, opportunity cost).

3. (Scarcity, Technology) has played an increasingly important role in producing goods more cheaply.

4. The lack of sufficient resources to meet a society's needs is called (consumption, scarcity).

5. A (traditional economy, market economy) is one in which individuals compete for customers to get the best prices they can for their goods or services.

6. In a (command economy, mixed economy), both individual citizens and government play roles in the production and distribution of goods and services.

7. The term (free enterprise, opportunity cost) describes a system in which individuals make their own economic decisions without interference from government.

8. (Capital, profit) is anything produced in an economy that is used to produce other goods and services.

Comprehension and Critical Thinking


a. Explain Why do all economic choices have an opportunity cost?

b. Identify Main Ideas Suppose that you decide to go to the movies instead of studying for a test. What is the opportunity cost of your decision?

c. Determine Relevance What factors of production are necessary to grow tomatoes for profit?


a. Recall What are three basic economic questions you should ask yourself if you want to open a restaurant?

b. Demonstrate Reasoned Judgment Suppose that you are starting a tutoring business. What questions should you ask yourself as you plan your business?

c. Identify Cause Choose an example of a new technology, and then explain how it has resulted in new ways of producing goods or services.


a. Describe Describe the three basic types of economic systems.

b. Compare and Contrast What are the main differences and similarities among the three systems?

c. Draw Conclusions What does the fact that the United States has a free- enterprise system suggest about the American values?


12. Skills Synthesizing Information Does your school have a recycling program? A teacher appreciation day? A mentoring program for new students? Other opportunities to volunteer? Plan a story for your school newspaper that synthesizes text with charts, graphs, or photos. Explain how the images will fit with and add information to the text.

13. Writing Research an ancient society of your choice, such as Egypt or Rome. Write a narrative describing its economic system and evaluating the effectiveness of that system.


14. Active Citizen Suppose that you and your classmates want to earn money for a class trip to France. Make the necessary economic decisions. Present your plan and your budget to the class.

15. Math Practice Calculate the number of hours in one week. Subtract one third for the time you spend sleeping. Then write down the number of hours you spend each week on all your activities (e.g., school, homework, sports, dance practice). What is the best use of the time left over?

16. Civics and Economics Discuss the advantages and disadvantages of a command versus a market system.

17. Analyzing Visuals Study the photo. What kind of economy is pictured? How do you know?

Standardized Test Prep

Test-Taking Tips

Standardized tests often ask you to answer questions about what you have read. Read the paragraph and answer the questions that follow.

A market economy has always been basic to the United States. In 1776, the year of the United States' birth, Scottish philosopher Adam Smith published The Wealth of Nations, which clearly explained the benefits of competition and free enterprise. American journalist Robert Samuelson, who frequently writes about economics, wrote that "the market is not some magical process, but merely a system that allows trial and error—rewarding success and punishing failure—as a daily event."

Choose the letter of the best answer.

TIP When all the answer choices appear in the text, reread the question to be sure that you are choosing the answer that best matches what is being asked.

1. What does Samuelson think the market is?

A a magical process

B a system that allows trial and error

C a success and a failure

D a daily event

The correct answer is B. All four phrases appear in the paragraph, but B matches what Samuelson says.
TIP When a question asks for information that has not been directly given in the passage, check each choice against the passage to see which inference is the most reasonable.

2. What would Adam Smith think of Samuelson's opinion about the market?

A Smith would agree with Samuelson.

B Smith would disagree with Samuelson.

C Smith would feel that Samuelson did not understand the market.

D Smith would laugh at Samuelson.


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