Answering the Three Economic Questions 2-1 1

Three Key Economic Questions 1. What goods and services should be produced? 2. How should these goods and services be produced? 3. Who is going to consume these goods and services? Every society must answer these questions, but their answers may differ depending on their beliefs, values and traditions.

Common Economic Goals Economic Efficiency Economic Freedom A society’s economic goals determine how they answer the 3 questions. Here are some of the common economic goals: Economic Efficiency Economic Freedom Economic Security & Predictability Economic Equity Economic Growth and Innovation Full Employment

Common Economic Goals A society’s economic goals determine how they answer the 3 questions. Here are some of the common economic goals: Economic Efficiency: Efficiency is achieved when society is able to get the greatest amount of satisfaction from available resources. With efficiency, society cannot change the way resources are used in any way that would increase the total amount of satisfaction obtained by society.

Common Economic Goals Economic Equity : A society’s economic goals determine how they answer the 3 questions. Here are some of the common economic goals: Economic Equity : Equity is achieved when income and wealth are fairly distributed within a society. Almost everyone wants a fair distribution. However, what constitutes a fair and equitable distribution is debatable. Some might contend that equity is achieved when everyone has the same income and wealth. Others contend that equity results when people receive income and wealth based on the value of their production.

Common Economic Goals Economic Freedom A society’s economic goals determine how they answer the 3 questions. Here are some of the common economic goals: Economic Freedom The key ingredients of economic freedom are personal choice, voluntary exchange, freedom to compete in markets, and protection of person and property.

Complementary Goals Some economic goals work well together. For example, Economic freedom and economic growth and innovation seek to move the economy in the same direction. In a similar way, economic security and full employment are complementary goals.

Conflicting Goals Some economic goals clash. Economic freedom and economic equity are not compatible goals, nor are innovation and predictability. Societies must prioritize their goals and realize that achieving certain goals comes at the cost of other goals

Economic Systems We will start with 3 basic economic systems before adding the mixed economy. Traditional Economies Command Economies Market Economies

Traditional Economies In a traditional economy, economic decisions are based on custom and historical precedent. For example, in tribal cultures or in cultures characterized by a caste system, people in particular social strata or holding certain positions often perform the same type of work as their parents and grandparents, regardless of ability or potential.

Command Economies In a command economy, governmental planning groups make the basic economic decisions. They determine such things as which goods and services to produce, their prices, and wage rates. Cuba and North Korea are modern examples of command economies. The Soviet Union was an historical example of a command economy.

Market Economies In a market economy, economic decisions are guided by the changes in prices that occur as individual buyers and sellers interact in the market place. Other names for the market system are free enterprise, capitalism, the price system and laissez-faire. The economies of the United States, Singapore, and Japan are identified as market economies since prices play a significant role in guiding economic activity.

Mixed Economies There are no pure command or market economies. To some degree, all modern economies exhibit characteristics of both systems and are, therefore, often referred to as mixed economies. For example, in the United States the government makes many important economic decisions, even though the price system is still predominant. Even in strict command economies, private individuals frequently engage in market activities, particularly in small towns and villages.

Comparing Economic Systems Traditional Economy Command Economy Market Economy Mixed Economy What will be produced? What has always been produced. What the government orders. What the people will buy. Certain basic services are run by the government for the benefit of all. Most businesses are privately owned and prices are controlled by the market. How will it be produced? The way it has always been produced. However the government says. By the least costly method. Who will consume it? Decided by tradition or custom. Whoever the government allows. Whoever is willing to buy it.

Economic Systems: The Key Point The key point to remember is that every individual and every society must contend with the problem of scarcity. Every society, regardless of its political structure, must develop an economic system to determine how to use its limited productive resources to answer the three basic economic questions of what, how, and for whom to produce.

Review Questions Identify the three key economic questions every society must answer. Analyze the societal values that determine how a country answers the three economic questions Explain the characteristics of traditional, command, and market economies and describe the societal values that influence them.

Vocabulary to Know and Use economic system factor payments patriotism safety net standard of living traditional economy market economy Economic freedom Economic security & predictability Economic efficiency centrally planned economy command economy mixed economy free enterprise capitalism laissez-faire price system Economic equity