Three Fundamental Economic Questions Guns vs. Butter 1. What to Produce? The problem of scarcity imposes a restriction on the ability to produce everything we want during a given period, so the choice to produce “more” of a good requires producing “less” of another good.

Three Fundamental Economic Questions 2. How to Produce? Vs. How do we mix technology and scarce resources in order to produce goods and services?

Three Fundamental Economic Questions 3. For Whom to Produce? Society must have a method to decide who will be “rich” and who will be “poor”.

Economic Security and Predictability 5 Economic Goals Economic Efficiency Economic Efficiency Making the most of resources Economic Freedom Freedom from government intervention in the production of goods and services Economic Security and Predictability Assurance that goods and services will be available , payments will be made on time, and a safety net will protect individuals in times of economic disaster Economic Equity Fair distribution of wealth Economic Growth and Innovation Innovation leads to economic growth, and economic growth leads to a higher standard of living Economic Freedom Economic Security and Predictability Economic Equity Economic Growth and Innovation

Traditional Economies Relies on habit, or ritual to decide how to answer the 3 economic questions. Revolves around the family Work divided along gender lines Agricultural and hunting practices usually dominate the economy Slow to adopt new technology or ideas

Centrally Planned (Command) Economies The government owns both the land and capital and decides on behalf of the people how to answer the 3 economic questions Government controls all aspects of production Socialism – government owns some FOP Karl Marx – The Communist Manifesto

Specialization of tasks makes the economy more efficient Free Market Economies Individuals and privately owned businesses own the factors of production and decide how to answer the 3 economic questions Specialization of tasks makes the economy more efficient Everyone acts in their own self-interest There is no government intervention Laissez Faire Adam Smith’s Invisible Hand Self-interest and competition work together to regulate the marketplace

wages, rent, interest, profits Circular Flow of Money Factor Payments wages, rent, interest, profits $ Product Market Factor Market F.O.P L.L.C Businesses Households Supply Goods and services Expenditures Demand $

Economic decisions are made by individuals with government oversight Mixed Economies The people answer the 3 economic questions with some intervention from the government to account for market failures Economic decisions are made by individuals with government oversight Government is a key component of economic activity All nations exist in the “mixed economy continuum” N. Korea Iran Cuba United Kingdom France Peru Canada United States Singapore Russia Centrally Planned Free Market