3 Economic Questions Who decides… What to produce? How to produce it?

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Presentation transcript:

3 Economic Questions Who decides… What to produce? How to produce it? Who gets it?

Three Basic Economic Questions This illustration shows two different approaches to the question of how to combine the factors of production. Analyze Information Which approach is most efficient? Explain your answer.

Conflicting Economic Goals Economic Goals of Society Efficiency Freedom Security Equity Growth Conflicting Economic Goals

Economic Goals of Society In recent years, many retailers have turned to the Internet to sell their goods and services. Describe How might the use of the Internet help achieve the economic goal of efficiency?

Economic Goals of Society Household income rose between 1976 and 2011 at all five income levels—but not at equal rates. Analyze Graphs Which income group saw the greatest change?

Quiz: Three Basic Economic Questions How is a society’s economic system defined? A. by how it answers the three basic economic questions B. by the decisions it makes about who consumes goods and services C. by the resources it uses to produce goods and services D. by the trade-offs it accepts in order to produce goods and services

Quiz: Economic Goals of Society Which economic goal reflects the desire of individuals to make their own choices about owning property or becoming entrepreneurs? A. efficiency B. freedom C. security D. equity

Traditional Economies “Tradition”= most important Economic activity based on how things have always been done. Habit and custom dictate economy Hunter/gatherer societies Individual decisions based on tradition, not what they would personally like to do.

Why Do Markets Exist? Today, markets can exist online, where buyers and sellers meet to exchange goods and services. Explain How can a market exist in a place where people do not physically meet?

Why Do Markets Exist? This farmer specializes in raising one crop, using income from its sale to purchase equipment and other goods. Test Conclusions What evidence can you see that the farmer earns income from the specialized production of one crop?

Elements of a Free Market Economy Individuals and businesses make their own decisions about what to buy or sell. Market economies are also called capitalist economies because the capital that entrepreneurs invest in businesses is a vital part of the system.

Market Economy People in firms act in their own best interests when making economic decisions Adam Smith People’s decisions act as “votes” on various products and businesses “Market”= place where people gather to buy, sell and trade goods

Private Property Rights Economic Freedom Basic Characteristics of Free Enterprise Opportunity Incentives Profit Motive Competition Legal Equality Private Property Rights Economic Freedom

Key Roles in the Free Enterprise System The Role of the Consumer Interest group The Role of the Entrepreneur

Economic Freedom and the Constitution Property Rights 4th Amendment- due process Taxation Article I- right to tax 16th Amendment- income tax Contracts Article 1 Sect. 10- inference with contracts

Economic Freedom and the Constitution The Limited Role of Government in the Marketplace Information and Free Enterprise Freedom of Information Act Protecting Public Health, Safety, and Well-Being EPA OSHA Negative Effects of Regulation Hamper competition by in creased costs Increase barriers to entry

Market Economy Advantages Disadvantages Adjusts to change over time High degree of individual freedom Encourages independence and creativity Little to no government influence Rewards only to “productive” individuals Economic conditions can be uncertain and unstable Not as many free and public services Possibility of market failure Advantages Disadvantages

Advantages of a Free Market The free market system offers many benefits to producers and consumers. Analyze Charts Which of the advantages of the free market do you think is most important to producers? Explain your answer.

How Markets Self-Regulate Adam Smith was an 18th-century philosopher whose ideas continue to influence free market economic thinking today.

How Markets Self-Regulate In a free market, incentives of all sorts influence individuals to act in their own self-interest. Identify Central Ideas Use one of the examples from this diagram to explain how the incentive given leads to the response indicated.

Elements of a Free Market Economy The circular flow model shows the interaction between households and firms in a free market. Analyze Charts What is the primary item that changes hands in the monetary flow?

Sectors: B. Business Firms D. Consumer Households

Resource / Factor Market Product Market A. Where factors of production (LLCE) are supplied and demanded (bought and sold). Product Market C. Where goods and services are supplied and demanded (bought and sold)

Economic Flows Money Flows Real Flows: Payments for goods and services (expenditures) Payments for factors of production (income) Goods and services Factors of Production Real Flows:

Self-Interest- operate for personal gain How Markets Self-Regulate Self-Interest- operate for personal gain Incentives and Competition- reward The Invisible Hand- Adam Smith Prices are responsive to collective market forces rather than the choices of individual producers

Quiz: Why Do Markets Exist? A. to allow people to earn money B. to concentrate the productive efforts of individuals C. to allow people to exchange goods and services D. to increase profits for business owners

Quiz: Elements of a Free Market Economy According to the circular flow model of a market economy, firms buy factors of production from households, then A. use these factors to produce goods and services. B. sell factors of production to households. C. sell free markets to households. D. use these factors to eliminate competition.

Quiz: How Markets Self-Regulate What role does competition among producers play in a free market? A. It allows firms to produce what consumers want while increasing prices. B. It causes firms to produce what consumers want while moderating prices. C. It encourages firms to produce goods consumers would never demand on their own. D. It forces consumers to pay high prices for what they want.

Quiz: Advantages of a Free Market Why does a free market economy result in the availability of a wide variety of goods and services? A. because consumers have incentives to meet producers’ desires B. because markets reward producers who can produce a large variety of products C. because producers have incentives to meet consumers’ desires for variety D. because the government tells producers what to make

Quiz: Basic Characteristics of Free Enterprise Which of the following is an example of the profit motive as an incentive? A. A business owner expands a factory to make more goods. B. A shopper chooses a product because of its low price. C. A producer starts a benefits program for workers. D. A consumer engages in a voluntary exchange.

Quiz: Key Roles in the Free Enterprise System When consumers choose not to purchase a good, what is one likely response by the producer of that good? A. raise the price of the good B. keep the price of the good at the current level C. return the price of the good to an earlier level D. lower the price of the good

Quiz: Economic Freedom and the Constitution The due process clauses of the Constitution support the principle that A. no legislature can keep an owner from selling his or her private property. B. only through a public trial can government take someone’s private property. C. private property can never be taken from an owner. D. government can take private property only to meet a public need.

Quiz: The Limited Role of Government in the Marketplace How might government water-pollution regulations serve the public interest? A. by keeping waterways open for the transport of goods B. by restricting the watering of lawns during a drought C. by limiting the amount of water a business could use D. by ensuring that water does not contain toxins that could endanger people