1. More Choices: 3 Basic Economic Questions
1. What to produce?
Goods and Services
Good
Tangible commodity
Consumer Good: Intended for final use by consumer
Capital Good: A good used to make other goods and services
Durable Good: Lasts 3 or more years with regular use
Nondurable Good: Lasts less than 3 years with reg. use
Services:
Work that is performed for someone; can’t be touched or felt
2. How to produce?
Hand made; with robots; in China, Mexico, or South GA
3. For whom to produce?
Consumers
People using goods and services
What type of consumer? Man? Woman? Rich? Poor? Americans? French?
Consumption
The process of using up goods and services
Conspicuous Consumption
Use of goods and services to impress others

2. Types of Economies
Societies must answer the 3 Basic Questions and decide what goals are important to them. They organize based on how they answer these questions and how they rank the economic goals of their society.
Traditional
Characteristics, strengths, weaknesses
Command
Market
“Laissez Faire” and Adam Smith
Mixed (U.S.)

3. Traditional Economies
In a traditional economy, resource use and social behavior are dictated by ritual, habit, or custom.
Advantages - answers to WHAT, HOW, and FOR WHOM to produce are determined by customs and tradition.
Disadvantages- tends to discourage new ideas and new ways of doing things.
Examples ; the central African Mbuti, the Australian Aborigines, and the Inuit of Northern Canada.

4. Traditional Economy Economic System Private Ownership Profit Motive
Consumer Sovereignty
Competition
Government Regulations
Traditional
Property rights are based on historical property rights and transfer of property would follow traditional rules of the culture
People who provide goods and services most likely provide the same good or service their ancestors provided. It would be difficult for someone to work in a field other than the one his or her ancestors had.
The production of goods and services is based on what has always been produced so changes in consumer taste for new goods and services would not change the goods and services produced in the economy
There may be more than one seller of a particular good or service, but the sellers are likely to continue operating the same way their ancestors operated so it is unlikely that competition will lead to lower prices or a more efficient use of resources.
Traditional leaders, like councils of elders or tribal chiefs, will typically be in charge of moderating disputes between members of the community. They will make their decisions based on how the culture has decided in the past

5. Command Economies
In a command economy, a central authority makes the major decisions about WHAT, HOW, and FOR WHOM to produce.
Advantages- it can change direction quickly, and it allows many citizens to receive goods and services they otherwise could not afford.
Disadvantages - loss of individual freedom to choose, the production of low-quality goods, a large decision making bureaucracy, and lack of individual initiative.
Socialism is a modern, somewhat more liberal version of a command economy.

6. Command Economic System Private Ownership Profit Motive
Consumer Sovereignty
Competition
Government Regulations
Command
d Property rights, if any, are insecure since central planners make all economic decisions. Property seizures are common if the central planner thinks the property should be used in another capacity.
Little opportunity to pursue individual rewards since all economic decisions are made by a central planner. Small businesses, if allowed, will likely return a large percentage of profits to the central government
Individual consumers have little say in what businesses or government producers offer as goods and services. They may be told how much of each good or service they are allowed to have. Even if consumers have money available to buy, there may be shortages of the more desirable goods because the central planners did not authorize the right level of production.
Since the government is the producer of most goods and services, there is little or no competition among individual firms. This means there is little incentive to innovate, lower prices, increase quality, or use resources efficiently.
The government or central planner makes almost all decisions about the production of goods and services in the economy

7. Command Central or main government answers production questions
Can be democratic (socialist) or authoritarian (dictator)
Government tends to own or control main resources

8. Which of the disadvantages of a command economy is shown here
Which of the disadvantages of a command economy is shown here? Explain your answer

9. Market Economy A market economy is based on capitalism.
Supply, demand, and the price system help people make decisions and allocate resources.
People can spend money on what they want and can own resources privately.
Advantages include a high degree of individual freedom and customer satisfaction, a variety of goods and services, the incentive to take care of private property, and decentralized decision making.
Disadvantages include not providing for basic needs of everyone, a shortage of some services, and a high degree of uncertainty.

10. Market Economic System Private Ownership Profit Motive
Consumer Sovereignty
Competition
Government Regulations
Market
Property rights are strong. Individuals and firms own all the factors of production. If a government exists, its main role is to apply the rule of law governing property rights to all property disputes in a fair and equal way
The profit motive incentivizes individuals to start new businesses and to make their businesses efficient. Firm owners will be able to keep most or all of their business profits
Firms produce only the goods and services they think consumers are willing and able to buy. Products that do not sell will be discontinued and firms will increase the quantity supplied of products that are popular with consumers.
There is a high level of competition because firms can freely open and close businesses. The entry of new businesses in the market for a product incentivizes firms to lower prices, increase quality, and/or become more efficient with resources.
Government regulation is minimal. If regulation exists, the focus is on protecting property rights, ensuring high levels of competition, and protecting consumers from harm.

11. Consumers and producers answer production questions through voluntary trade
Market
Capitalism
-Consumers decide what is produced
Producers decide how it will be produced
Income depends upon the resources you have to sell

12. Mixed Economy
In a mixed economy, the state’s involvement in economic decisions can vary considerably.
A mixed economy includes characteristics of traditional, command, and market economies.
Advantages of mixed economies include:
Providing assistance for people who might be left out of the country’s economic progress
Faster growth than command economies
Disadvantages of mixed economies include:
Higher tax rates to support social benefits
Limited availability of services or decreasing quality of services
Lower efficiency than pure capitalism
Governments are likely to see market-oriented reforms as a threat

13. Mixed Economy
In a mixed economy, the state’s involvement in economic decisions can vary considerably.
A mixed economy includes characteristics of traditional, command, and market economies.
Advantages of mixed economies include:
Providing assistance for people who might be left out of the country’s economic progress
Faster growth than command economies
Disadvantages of mixed economies include:
Higher tax rates to support social benefits
Limited availability of services or decreasing quality of services
Lower efficiency than pure capitalism
Governments are likely to see market-oriented reforms as a threat

14. Government Role IN The US
Provides public goods and services only when there is a reason that the private market is unable to provide the good or service at a level considered beneficial to society
Redistribute income
Market Failures
Externalities( positive or negative) when a third party other than the consumer or producer of a good is hurt or benefits from the production or consumption of that good

15. Our Version of the Mixed Economy: The Free Enterprise System
Free Enterprise System Characteristics
Economic Freedom
Voluntary Exchange
Buyers and sellers freely and willingly engaging
Both are better off after the exchange, because they believe that what they receive is worth more than what they gave.
In other words, their Marginal Benefit was greater than their Marginal Cost
Private Property
Concept that people have the right and privilege to control their possessions as they wish
House/Car or Talents/Skills
Profit Motive
Parties must believe they profit from exchange: MB > MC
Profit
Extent to which person or organization believes he/she is better off at the end of a period than they were at the beginning
Force that drives people to improve their well-being
Responsible for most growth
The incentive to make profit

16. Free Enterprise System cont.
Capitalism
System where individuals own FOP
Competition
Struggle to attract buyers
Free Enterprise System allows this to flourish
Incentives Help Drive Competition
Businesses have an incentive to be efficient and keep costs low to increase profits.
Individuals have an incentive to be efficient to be able to buy more goods and services
Thus, our system has built in incentives to become more efficient

17. Free Enterprise System cont.
Roles in the System
Entrepreneur
Risk taker; Identifies area to make a profit
Others notice profit and create competition
Consumer
Determine what is produced
Consumer Sovereignty
“Ruler of the Market”
Government
Protector
Protects individuals ex. FDA, SEC, FBI
Enforces contracts, protects private property, ensures fair play
Producer and Consumer
Provides services ex. Police, army, schools
Consumes factors to produce things
Regulator
Preserves competition ex. Microsoft/Apple
Oversees communication, nuclear power, banking
Promoter of national goals
Creates mixed economy
People carry on economic affairs freely, but are subject to economic intervention and regulation