1. Learning Goals: Answering the Three Economic Questions
Identify the three key economic questions of what to produce, how to produce, and who consumes what is produced.
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.

2. The Three Economic Questions
Every society must answer three questions:
What goods and services should be produced?
How do you think goods and services produced in the U.S. differs from other countries?
How should these goods and services be produced?
Electricity?
Education?
Agriculture?
Who consumes these goods and services?
Societies must decide how to distribute the available goods and services

3. Economic Goals
Societies answer the three economic questions based on their values
Economic Goals
Making the most of resources
Economic efficiency
Freedom from government intervention in the production and distribution of goods and services
Economic freedom
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 security and predictability
Fair distribution of wealth
Economic equity
Innovation leads to economic growth, and economic growth leads to a higher standard of living.
Economic growth and innovation
Societies pursue additional goals, such as environmental protection.
Other goals

4. Economic Goals Activity
Read the “Economic Goals and Societal Values” section on pages in the textbook
After reading, rank which economic goals you believe should be most important for our society
Include a brief explanation that explains your rankings

5. Four Economic Systems
An economic system is the method used by a society to produce and distribute goods and services.
Traditional economies rely on habit, custom, or ritual to decide what to produce, how to produce it, and to whom to distribute it.
In a centrally planned economy the central government makes all decisions about the production and consumption of goods and services.
In a market economy economic decisions are made by individuals and are based on exchange, or trade.
Mixed economies are systems that combine tradition and the free market with limited government intervention.

6. Learning Goals: The Free Market
Explain why markets exist.
Describe the self-regulating nature of the marketplace.
Identify the advantages of a free market ecomony.

7. Bell Ringer
What comes to mind when you hear the term self- interest?

8. Why Do Markets Exist?
Markets exist because none of us produces all the goods and services we require to satisfy our needs and wants.
A market is an arrangement that allows buyers and sellers to exchange goods and services.
Specialization is the concentration of the productive efforts of individuals and firms on a limited number of activities.

9. The Free Market Economy
monetary flow
physical flow
Circular Flow Diagram of a Market Economy
Households
Firms
Based on voluntary exchanges
Households and business firms use markets to exchange money and products.
Households own the factors of production and consume goods and services.
Households pay firms for goods and services.
Product market
Firms supply households with goods and services.
Households supply firms with land, labor, and capital.
Firms pay households for land, labor, and capital.
Factor market

10. The Market’s Self-Regulating Nature
In every transaction, the buyer and seller consider only their self-interest, or their own personal gain. Self- interest is the motivating force in the free market.
Producers in a free market struggle for the dollars of consumers. This is known as competition, and is the regulating force of the free market.
The interaction of buyers and sellers, motivated by self- interest and regulated by competition, all happens without a central plan. This phenomenon is called “the invisible hand of the marketplace.”
How can the introduction of new electronic devices help illustrate this concept?

11. Writing Activity – Self Interest
What do you plan to do after graduation? Will you get a job, go to college, travel, start your own business?
Write a paragraph about how your choices are motivated by self-interest
Now think about the specifics of your choices – which college? Where will you travel? What kind of job or business?
Write a second paragraph explaining how these choices are also motivated by self-interest.
Write a final paragraph explaining how your self- interest might be affected by competition.

12. Advantages of the Free Market
Economic Efficiency
Producers make only what consumers want, when they want it, and generally at prices they are willing to pay.
Economic Growth
Because competition encourages innovation, free markets encourage growth.
Economic Freedom
Workers work where they want, firms produce what they want, and individuals consume what they want.
Additional Goals
Free markets offer a wider variety of goods and services than any other economic system.

13. Discuss
Why is economic equity difficult to achieve in a free market?

14. Economic Profile: Adam Smith (P. 33)
Read and discuss the “checking for understanding” questions together.

15. Learning Goals: Centrally Planned Economies
Describe how a centrally planned economy is organized.
Analyze the centrally planned economy of the former Soviet Union.
Identify the problems of a centrally planned economy.

16. Bell Ringer
Imagine you are a worker with a guaranteed job in a centrally planned economy. You are told what and how much to produce and when to produce it.
How deeply committed would you be to efficiency, quality, and innovation?

17. Organization of Centrally Planned Economies
In a centrally planned economy, the government owns both land and capital. The government decides what to produce, how much to produce, and how much to charge.
Socialism is a social and political philosophy based on the belief that democratic means should be used to distribute wealth evenly throughout a society.
Communism is a political system characterized by a centrally planned economy with all economic and political power resting in the hands of the government.
Unlike socialists, communists believed that a socialist society can only come about after a violent revolution.

18. Case Study: The Former Soviet Union
Read pages and be prepared to discuss the following:
Pros/cons of the economic system of the former Soviet Union.
In the Soviet Union, what was the opportunity cost of the emphasis on heavy industry?

19. Learning Goals: Modern Economies
Explain the rise of mixed economic systems.
Describe the role the government plays in a mixed economic system.
Compare the mixed economies of various nations using a continuum.
Explain the role of free enterprise in the economy of the United States.

20. The Rise of Mixed Economies
Market economies, with all their advantages, have certain drawbacks.
Limits of Laissez Faire
Laissez faire is the doctrine that government generally should not interfere in the marketplace.
How does the government intervene in our economy?
Education, health care, mass transit; laws protecting property rights and contracts, patents, anti-monopoly regulations

21. Government’s Role in a Mixed Economy
The government purchases land, labor, and capital from households in the factor market, and
Purchases goods and services in the product market.
monetary flow
physical flow
Circular Flow Diagram of a Mixed Economy
Households
Firms
Product market
taxes
government purchases
Government
expenditures
government-owned factors
taxes
Factor market

22. Comparing Mixed Economies
An economic system that permits the conduct of business with minimal government intervention is called free enterprise. The degree of government involvement in the economy varies among nations.
Continuum of Mixed Economies
Centrally planned
Free market
Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick
Iran
North Korea
Cuba
China
Russia
Greece
Peru
United States
South Africa
France
United Kingdom
Botswana
Canada
Singapore
Hong Kong