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Answering 3 Economic Questions

  • Chapter 2: Section 1
  • Pages 23-27

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Scarcity and Society

  • Due to scarcity, societies and countries are forced to make some difficult decisions.

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  • To aid in this process different systems have evolved over time.

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  • Economic System – the method used by a society to produce and distribute goods and services based on its values and goals.

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The 3 Economic Questions

  • Each society must answer the following economic questions…

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  • What goods and services should be produced?
  • How should these goods and services be produced?
  • Who consumes these goods and services?

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What Should Be Produced?

  • Each society works to meet the needs and wants of its members.

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  • Culture plays a significant role in this process.

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How Should It Be Produced?

  • Each society must determine how to use its factors of production to meet the demands of that society.

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    • Land, Labor and Capital

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Who Consumes the Products?

  • The answer to this is how the society chooses to distribute income.

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  • Factor Payments – the income people receive for supplying the factors of production.

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Factor Payments

  • Landowners receive rent.

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  • Workers receive wages.

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  • Entrepreneurs receive profits.

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  • Those who lend money to build factories or buy machinery receive interest payments.

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Economic Goals

  • Economic Efficiency

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  • Economic Freedom

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  • Economic Security and Predictability
  • Economic Equity

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  • Economic Growth and Innovation

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  • Additional Goals

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Additional Goals…

  • Environmental Protection

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  • Full Employment

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  • Universal Medical Care

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  • A Safety Net

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  • A rising Standard of Living

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Four Economic Systems

  • Four different economic systems have developed in order to address the three key economic questions of every society.

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    • Traditional Economies
    • Market Economies
    • Command Economies
    • Mixed Economies

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Traditional Economies

  • Rely on habit, custom, or ritual.
  • Little room for innovation or change.
  • Revolves around the family.
  • Work is divided by gender.
  • Agricultural and hunting practices.
  • Slow to adapt to new technology and ideas.

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Market Economies

  • Decisions are made by individuals.
  • The use of exchange or trade in a free market.
  • This system is also known of as capitalism.

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Command Economies

  • The central government decides all three of the key economic questions.
  • This system is also known as a centrally planned economy, or Communism.

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Mixed Economies

  • Most modern economic systems are mixed.
  • A market-based economic system with limited government interference.
  • This system is also known of as Socialism.
  • This is the economic system we use in the U.S.A.