Political and Economic Analysis Chapter 3

What is an economy? Section 3.1

Objectives Define the concept of an economy List the factors of production Explain the concept of scarcity Discuss how traditional, market, command, and mixed economies answer the three basic economic questions Cite examples of various economic systems

Key Terms Economy Resources Factors of production Infrastructure Entrepreneurship Scarcity Traditional economy Market economy Command economy

Economic Systems Economy (economic system) the organized way a nation provides for the needs and wants of its people. A nation chooses how to use its resources to produce and distribute goods and services. A country’s resources determine economic activities, such as manufacturing, buying, selling, transporting, and investing.

Economic Systems Resources All the things used in producing goods and services. Economists use the term factors of production when they talk about resources 4 categories Land (tangible) Labor (intangible) Capital (tangible) Entrepreneurship (intangible)

Economic Systems Resources Land Labor Capital Entrepreneurship Includes everything contained in the earth or found in the seas. Labor Refers to all the people who work Includes all part-time and full-time workers, managers, and professional people Capital Money to start and operate a business Entrepreneurship Skills of people who are willing to invest their time and money to run a business.

Scarcity Different economies have different amounts of resources The difference between wants and needs and available resources is called scarcity Forces nations to make economic choices

How Does An Economy Work? Nations must answer three basic questions when deciding how to use their limited resources Which goods and services should be produced? How should the goods and services be produced? For whom should the goods and services be produced? The way nations answer these questions defines their economic systems

How Does An Economy Work? Based on the way nations answer the basic questions they are classified into three broad categories Traditional Market Command

Traditional Economies Traditional Economy Traditions and rituals answer the basic questions of what, how, and for whom. Often based on cultural or religious practices and ideals have been passed from one generation to the next. Activities are assigned through tradition rather than by choice

Traditional Economies What? In a traditional economy there is little choice as to what to produce. If people belong to a community of farmers, they farm for generations. How? The potter whose family has made clay pots for generations will continue to follow the practices of his or her ancestors For whom? Tradition regulates who buys and sells and where and how the exchange takes place

Market Economies Market Economy No government involvement in economic decisions Individuals and companies own the means of production Businesses compete for consumers

Market Economies The government lets the market answer the three basic economic questions What? Consumers decide what should be produced in a market economy through the purchases that they make in the marketplace How? Businesses in a market economy decide how to produce goods and services Must be competitive to produce quality products at lower prices For whom? The people who have more money are able to buy more goods and services

Command Economies Command Economy A system in which a country’s government makes economic decisions and decides what, when, and how much will be produced and distributed.

Command Economies The government is responsible for answering the three basic economic questions What? One person or a group of government officials decides what products are needed based on what they believe is important How? Government decides how goods and services will be produced Controls all employment and benefits For whom? The government decides who will receive what is produced.

Mixed Economies No economy is purely a traditional, market, or command economy The USA is considered a mixed economy with leanings toward a market economy There is some government involvement through the laws and regulations that businesses must follow. All economies in the world today are mixed Depends on how much a government interferes with the free market

The three political philosophies that have shaped world economies are: Capitalism, Socialism Communism

Capitalism Capitalism Political Foundations of Capitalism A political and economic philosophy characterized by marketplace competition and private ownership of businesses. Same as free enterprise Government is concerned about its people and cares for those who cannot care for themselves. Political Foundations of Capitalism Democracy Believe that political power should be in the hands of the people

Communism Communism Characteristics of a Communist Country Social, political, and economic philosophy in which the government, usually authoritarian, controls the factors of production. There is no private ownership of property or capital. Theory is that societal classes are eliminated Characteristics of a Communist Country All people who are able to work are assigned jobs The government decides the type of schooling people will receive also tells them where to live. Low prices for food and housing subsidies Medical care is free Little or no economic freedom No financial incentive for people to increase their productivity

Socialism Differ from capitalist nations in the increased amount of government involvement in the economy Main goal is to meet basic needs for all and to provide employment for many. Characteristics of Socialist Countries Tend to have more social services to ensure a certain standard of living for everyone Medical care and education is free or low cost System for pensions and elderly care Businesses and individuals pay much higher taxes than those in capitalist countries

Socialism The Role of Government in Socialist Countries Government runs key industries and make all economic decisions Examples Canada Germany Sweden

Economies in Transition Most Eastern European countries that were once communist satellites have moved toward global market economies and more democratic forms of government State owned industries have been privatized in many of these nations Privatization The process of governments selling government-owned businesses to private individuals or businesses

Economies in Transition A Move Toward Privatization Socialist countries are selling some of their state-run businesses to help balance their budgets Great Britain sold its national phone company, national steel company, national sugar company, and several others. Great Britain also privatized British Airways and it has become Europe’s number-one airline

Economies in Transition Developing Economies Developing economies are mostly poor countries with little industrialization that are trying to become more prosperous and develop their infrastructure. Success depends on: Improving education levels of their labor force Directing and using foreign investment efficiently

Section 3.1 Questions Explain how the infrastructure of a country can be related to the factors of production. What three broad categories do economists use to classify all types of economic systems? In which economic system does the government let the market answer the three basic economic questions? In a country with a population of 290,342,554, how many people would be considered below the poverty line if the percentage in that category was 12.7 percent?