Economic Resources and Systems Chapter 2 Economic Resources and Systems

Learning Objectives Define scarcity. List the four factors of production. Identify the differences between market and command economies. Explain why most countries prefer a mixed economy.

What Is Economics? The study of how society chooses to use resources to produce and distribute goods and services for people’s consumption.

The Economic Problem A basic economic problem for any society is how to manage its resources. To answer this problem societies use different methods to answer the three basic economic questions. Figure 2.1 illustrates how your choices between wants and needs influence your economic situation.

Figure 2.1 Your Economic Reality At A Glance The average American spends $7 a day on food. People spend less than half of that on home-cooked meals. On a separate piece of paper, re-create this table below. Insert a check mark in the appropriate square based upon your eating experiences in one week. How do your choices influence your economic situation? CHOICE Fast Food Home Cooked Eat at Friends Sunday Monday Tuesday Wednesday Thursday Friday Saturday

Factors Of Production Natural Resources Human Resources Capital Resources Entrepreneurial Resources

Natural Resources Raw materials found in nature. Natural resources become factors of production. Trees become paper. Trees are the natural resources. Renewable natural resources – can be reproduced. example: wheat & cattle Nonrenewable natural resources – limited, cannot be reproduced. Ex: oil & coal.

Human Resources Knowledge, efforts, and skills of people. Needed for everything. Labor – skilled and unskilled, physical or intellectual. Biggest problem facing many nations today is a shortage of skilled labor.

Capital Resources The THINGS used to produce goods and services. Ex: buildings & equipment As wants and needs change so does the need for capital resources.

Entrepreneurial Resources The initiative to improve goods and services or create new ones. Key in dealing with scarcity.

Three Basic Economic Questions WHAT should be produced? HOW should it be produced? 3. WHO should share in what is produced

Economic Systems To use its limited resources effectively, every nation needs an economic system. Determines how resources will be used. Primary goal – provide people with a minimum standard of living, or quality of life.

Types of Economic Systems Market Command Mixed

Market Economy All economic decisions are made in the market place according to the laws of supply and demand. There are many incentives to produce more, but owners and producers reap the most benefit <negative aspect of Market Economy). Price plays and important role. Also called capitalism.

Command Economy All economic decisions are made by a central authority. Two types: 1. Communism - the state makes all economic decisions. The state controls all the resources for the common good. Ex. China, Cuba & Africa 2. Socialism - moderate command economy; The state owns major resources and makes key economic decisions. But individuals may own some businesses. Ex. France & Sweden Advantage: everyone has an equal standard of living. Less crime & poverty. Disadvantage: Less choices, prices are fixed, skilled workers may make same pay as unskilled workers, and little incentive for entrepreneurship. Also called planned or managed economy.

Example: United States Mixed Economy The state takes care of people’s needs while the marketplace takes care of people’s wants. Example: United States