Ch. 2.1 Answering the Three Economic Questions All societies must answer three key economic questions about the production and consumption of goods and services. Four different economic systems have developed in response to these three questions.

Economic Systems The method used by a society to produce and distribute goods and services Scarcity forces societies and nations to answer some hard economic questions; different economic systems have evolved in response to the problem of scarcity Which economic system a society employs depends on that society’s goals and values.

Three Key Economic Questions Each society must ask itself: What goods and services should be produced? How should these goods and services be produced? Who consumes these goods and services?

What goods and services should be produced? Each society must decide what to produce in order to satisfy its needs and wants. It is often to distinguish between needs and wants. The guns-or-butter trade off from Chapter 1 is a good example of this; because of our limited resources, each production decision that a society makes comes at an opportunity cost

How should goods and services be produced? Example questions: Should we produce electricity with oil, solar power, or nuclear power? Should teachers have classes of 20 students or 50 students? Should we produce food on large corporate farms or on small family farms? To get the same outcome, the three factors of production can be combined in different ways (see page 24, figure 2.1 for hand tools vs. modern mechanical equipment example)

Who consumes goods and services? American business and farms produce a lot of goods and services, but they are not unlimited; how do we decide who to distribute our goods to? This is decided by how societies choose to distribute income; factor payments are the income people receive for supplying factors of production (workers receive wages, landowners receive rent, etc.) Each society answers this question based on its social values and goals

Economic Goals Economic Efficiency: Most societies try to maximize what they can get for the resources they have Economic Freedom: Americans have the opportunity to make our own choices economically; however, many people all over the world face limitations on economic freedom (patriotism: the love for one’s country)

Economic Goals Continued Economic Security and Predictability: The assurance that goods and services will be available, payments will be made on time, and a safety net (set of govt. programs that protect people experiencing unfavorable economic conditions) will protect individuals in times of economic disaster Economic Equity: The fair distribution of wealth; many people believe in equal pay for equal work, but our society does not value all jobs equally (lawyers v. nurses, computer programmer v. truck driver, TEACHERS ;)

Economic Goals Continued Economic Growth and Innovation: Innovation leads to economic growth, and economic growth leads to a higher standard of living (level of economic prosperity) Additional Goals: Environmental protection, universal health care, and full employment are all other goals a society may have

Types of Economies Traditional Economy: relies on habit, custom, or ritual to decide what to produce. There is little room for innovation or change. Revolves around the family; boys take up occupations of their fathers while girls follow in their mother’s footsteps Usually small communities that work to support the entire group Agricultural and hunting practices usually lie at the heart of the people’s lives, laws, and religious beliefs These communities usually lack modern conveniences and have a low standard of living

Market Economy Economic decisions are made by the individual and are based on exchange, or trade Choices made by individuals determine what gets made and how, as well as who consumes the goods and services produced Also called free markets or capitalism

Centrally Planned/Command Economies Centrally Planned Economy: --The central government alone decides how to answer all three key economic questions --Also called command economies because a central authority is in command of the economy Mixed Economies: --Market based economic systems in which govt. plays a limited role