3 Economic Questions Every country must answer these 3 questions 1. What are we going to produce? 2. How are we going to produce them? 3. Whom are we producing them for? How they are answered will determine what type of economic system they have

Economic Systems 1. Traditional - Economic decisions rely on customs or rituals 2. Centrally Planned(Command) - Economic decisions are made by the Government -Planners decide what, how and for whom. - products are usually poor quality and limited supply

3. Market (Free market) Decisions are made by people engaged in voluntary exchanges Consumers determine what to produce Producers determine how to produce it Offers a wide variety of goods/services 4. MIXED Economy- Almost all countries have a mixed economy (see page 43) In US Free market – Consumers, Producers & The Government determine what, how and for whom (to produce)

US Market Economy -What makes us different (characteristics) Private Property- Owners have the incentive to care for their things Competition - Voluntary exchange benefits all - leads to better quality, lower prices & more variety

Market Cont. Entrepreneurship - Rewards those who take risks with Profits Limited Government involvement Rule of Law Patents, copyrights SELF INTEREST drives a market economy

Father of Economics Adam Smith “Wealth of Nations” 1776 Main point-Invisible hand of free market system guides the distribution of goods and services Government should stay out of economics and allow competition to regulate market Advantages of efficiency Easy to Regulate Offers Wide Variety Smith’s “invisible hand” is now called Voluntary exchange