Answering the Three Economic Questions Economic System n

Answering the Three Economic Questions

Economic System n n The method used by a society to produce and distribute goods and services United States? n n Sweden? n n Mixed economy, capitalism or free enterprise Centrally Planned or Socialism Former Soviet Union? n Centrally Planned or Communism

Three Key Economic Questions 1. What Goods and Services should be produced? n n Each society must decide what to produce to satisfy needs/wants because of limited resources Food and Shelter National defense and education Public Health/welfare

Three Key Economic Questions 2. How should these Good and Services be produced? n n Each society must decide what and how many resources to use to produce products Produce electricity through oil, nuclear or solar power. Large corporate farms or small family farms Factors of production play an important role

Three Key Economic Questions 3. Who Consumes these Goods and Services? n n Each society answers this by choosing how to distribute income. Compensation of supplying land, labor or capital. Why do doctors and lawyers get paid more than firefighters or police officers? Distribution of income is main difference between each economic system.

Economic Goals and Societal Values n Efficiency n n n Freedom n n n Making the most of the resources Best way in least time Free from government intervention Make your own choices Security and Predictability n n Assurance of goods/services availability Provide a safety net for disaster relief

Economic Goals and Societal Values n Equity n n n Fair distribution of wealth What should you be paid for a job? Growth and Innovation n n Leads to increasing wealth and higher standard of living Must provide new jobs/income for increasing population

Traditional Economy n n n n Habit, ritual or customs Little innovation Boys follow father Girls follow mother Few safety nets Resistant to change Low standard of living

Market Economy n n n Decisions made by individuals and based on exchange or trade No government intervention Also called: n n Free markets Pure Capitalism

Centrally-Planned Economy n n n Central government decides how to answer all economic questions. No free enterprise allowed Also called: n Command economy

Mixed (Modern) Economy n n Combination of Market and Centrally. Planned economies. Free Enterprise exists but there is also limited government intervention