Three Model Economies Pages 31-34

Three Major Questions Like individuals, societies face scarcity Societies must make decisions on how to use their resources. They ask: What are we going to produce? How is it to be produced? Who receives how much?

Pure Traditional Economy When the custom or tradition of a society determines the answers to the three major questions Discourages change and growth

Pure Traditional Economy What are we going to produce? What we have always produced How is it to be produced? The same way it has always been produced Who receives how much? People receive the same amount they have always received. Example: Bushmen of the Kalahari Desert

Pure Command Economy When government determines the answers to the three major questions Good in theory, but extremely difficult to do High possibility for errors Very little individual choice allowed for Example: Former Soviet Union

Pure Command Economy What are we going to produce? Government decides what goods and services to produce How is it to be produced? Government owns the natural and capital resources, so it decides Who receives how much? Government decides who works where and who gets paid what, so it decides

Pure Market Economy When the actions of buyers and sellers of goods and services determine the answers to the three major questions The uncoordinated actions of thousands working without a central plan

Pure Market Economy What are we going to produce? What consumers want to spend their money on How is it to be produced? Competition among producers determines how goods are produced Who receives how much? The market determines this (competitive prices)

Pure Market Economy Advantages: Goods and services that consumers want are produced Individuals can choose their job and change it as they wish Business owners can own resources, hire/fire workers as they wish, and decide how their business is run

Pure Market Economy Disadvantages: Goods and services go to consumers with the most money Demand can force consumers to pay high prices for goods and services (ex. new gaming systems) Overproduction/underproduction can happen “Buyer beware”

Basic Characteristics of PME Private property rights The right of individuals and corporations to own consumer goods as well as goods used in production (capital resources) Profit Excess revenue after expenses (the right to earn a profit)

Basic Characteristics of PME Consumer sovereignty The dominant role of the consumer in determining what, how, and for whom to produce Self-interest The pursuit of your own advantage

Basic Characteristics of PME Competition The search for higher wages, profits, and lowest prices (acts to regulate self-interest)