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011 What is the economic system in the United States?

 11. What is the economic system in the United States?
• Capitalist economy
• Market economy

If you want to start a business, maybe by opening a restaurant or a clothing store, the United States is a good place to do it. This is because the U.S. has a capitalist, or market, economy, making it acceptable and fairly easy for private entities (or individuals and businesses that are not owned by the government) to buy, sell, and trade things for money without government interference (or involvement by the government). In the U.S., the government doesn’t decide how much things should cost or how much of something should be produced (or made). Instead, prices and production are decided based on a system called supply and demand, which refers to how much of a thing exists and how many people want to have that thing. How do we know how much supply and demand there is for a product? There are two important factors. The first is profit (or money a business gets by selling something), and the second is self-interest, which is when a person makes decisions based on what is best for him or herself, without paying attention to what is best for other people.

A man named Adam Smith is considered the father of American capitalism. He wrote about his ideas in a famous book called The Wealth of Nations. He believed that a capitalist system is run by an invisible hand. The invisible hand is the idea that there is no need for government interference in the economy because the self-interest of individuals will serve the greater good (or the maximum benefits for everyone in society).

To understand this idea, imagine that a store near your home sells a piece of candy for $20. You think that this price is too high, but it is the only place to buy candy, so if you want candy, you have to pay the $20. However, if the store across the street begins selling the same piece of candy for $1, you will act in your own self-interest and buy the less expensive candy. The more expensive store will be forced to lower its candy prices to compete with the cheaper store, or else it won’t sell any candy and won’t make any profit. In this situation, everyone involved has acted out of self-interest, and the final result is a lower price for candy. The lower prices will serve the greater good of everyone in the neighborhood, because everyone can buy more candy. This is the basic principle (or explanation) behind the invisible hand and the United States’ market economy.


private entity – an individual or a business that is not owned by the government
* Government agencies don't have to pay taxes, but private entities do.

government interference – involvement by the government, usually when people or organizations do not want the government to become involved
* Why is there so much government interference in electricity pricing?

to be produced – to be made, manufactured, or created
* How many cigarettes were produced in the United States last year?

supply and demand – a way of talking about how much of a thing exists, how many people want to have that thing, and how much they are willing to pay for it
* According to idea of supply and demand, if many people want a lot of something, it will be very expensive, but as more companies begin making it, it will become less expensive.

profit – the money that a business makes by selling things after everything else has been paid for
* Each time I sell a sweater for $45, I make a profit of $20, since it costs $25 to make the sweater.

self-interest – making decisions based on what is best for oneself
* If I were acting out of self-interest, I would keep all my money for myself, but I think it is important to share my money with my family.

invisible hand – the idea that there is no need for the government to be very involved in the economy because the natural actions of buyers and sellers will
automatically make sure that the right things are being sold at the right prices
* Many people want to buy computers so more companies are making more of them, causing the price to go down. This is an example of the invisible hand.

greater good – maximum benefits or good things for everyone in society
* Few people want to pay more taxes, but if the money is used to help people, then
it's for the greater good, don’t you think?

principle – explanation; the reason why something happens; the idea behind something
* In physics, the uncertainty principle says that we cannot know exactly how quickly something is moving and exactly where it is at the same time.