1. Section 1 Answering the Three Economic Questions
Ch. 2 Economic Systems
Section 1
Answering the Three Economic Questions

2. Economic Systems
Scarcity forces societies to answer some key economic questions about how to use available resources.
An Economic system is the method used by a nation to produce and distribute goods and services.

3. Three Key Economic Questions
What goods and services should be produced?
How much of our resources should we devote to national defense, education, public health and welfare, or consumer goods?
Which consumer goods should we produce?
How should these goods and services be produced?
Should we produce electricity with oil, solar power, water power, or nuclear power?
Should we produce food on large corporate farms or family farms?
Who consumes these goods and services?
How is what is produced divided among population? By income? By need? By status?

4. Answers to the Questions
Because every nation has its own unique set of resources, goals, and values, they will answer the questions in a different way.

5. Economic Goals
The general economic goals and societal values that most economic system tries to address are:
Economic Efficiency
Economic Freedom
Economic Security and Predictability
Economic Equity
Economic Growth and Innovation

6. Economic Efficiency
Because resources are always scarce, most societies try to maximize what they can get for the resources they have to work with.
If a society can accurately assess what to produce, economic efficiency is increased. If not, resources are wasted.
Products also need to reach consumers. An economy that can’t deliver goods isn’t efficient.

7. Economic Freedom
Most of us value the opportunity to make our own choices. We are limited to some extent by laws that forbid purchasing or possessing certain items.
In the U.S., the economic freedoms that we enjoy are an important reason for our patriotism.
Patriotism is the love of our country that inspires us to defend it from invasion or protect its rights and maintain its laws and institutions.
Freedom is what our country was built on.

8. Economic Security and Predictability
Most people don’t like uncertainty. We want assurances that:
Goods and services will be available.
Payments will be made on time.
A safety net will protect individuals in times of economic disaster.
Most countries also believe in providing some sort of base income for retired people to ensure they can support themselves after retirement.

9. Economic Equity
Each society must decide the best way to divide its economic pie, or how should it fairly distribute its wealth.
What constitutes a fair share? Should everyone get the same or should it depend on how much one produces?
How much should society provide for those who are unable or unwilling to produce?
How should we provide for the ill and infirm?

10. Economic Growth and Innovation
An economy must grow for a nation to improve its standard of living, or level of economic prosperity. This must happen to provide new jobs and income for a growing population
Innovation causes this economic growth. Innovations in technology increase the efficiency of production.
Greater efficiency leads to economic growth, resulting in a higher standard of living.

11. Goals and Trade-offs
All nations must prioritize their economic goals, arranging them in order of importance to them.
Regardless how they are prioritized, one fact remains:
achieving any economic goal comes only with some kind of economic tradeoff.

12. Economies and Values
Four different economic systems have developed to address the three key economic questions.
Each system reflects a different prioritization of economic goals.
It also reflects the values of the societies in which these systems are present.

13. Traditional Economies
Relies on habit, custom, or ritual determine the answers to the three key economic questions as well as social norms.
There is little room for innovation or change.
This system revolves around the family, with work being divided along gender lines.
They support and provide for one another, not just for themselves or immediate family.

14. Traditional Economies
Agriculture and hunting practices lie at the heart of their lives, laws, and religious beliefs.
They lack modern conveniences and have a low standard of living.
They resist change and are slow to adopt new technology or radical new ideas. Change they feel is a threat to their very existence.

15. Market Economies
Individuals make decisions based on trade that occurs in markets.
These choices determine what gets made and who consumes goods and services.
Market economies are also called free markets, or capitalism.
We will discuss free markets in detail in Section 2

16. Centrally Planned Economies
The central government makes all decisions regarding production and consumption of goods and services.
Also known as command economies, because a central authority is in command of the economy.
We will discuss centrally planned economies in detail in Section 3.

17. Mixed Economies
These are market-based systems in which government plays a limited role.
Combine elements of traditional, market, and centrally planned economies.

18. Section 2 The Free Market
Ch. 2 Economic Systems
Section 2
The Free Market

19. Markets
A market is an arrangement that allows buyers and sellers to exchange things.
Markets exist because no one is self-sufficient.
None of us produce all we require to satisfy our needs and wants, so we specialize.
Specialization makes us more efficient.
Because of specialization, we need markets to exchange money, resources, and products.

20. Free Market Economy Factors of production are privately owned.
Businesses are privately owned.
Individuals buy what they want by interacting with sellers.
Businesses sell what they want by interacting with buyers.
In other words, buyers and sellers answer the three key economic questions of what, how, and who.

21. Free Market Economy Illustrated
Circular flow diagram – illustrates the exchange of money, resources, and products in a free market economy.

22. Circular Flow Model Video
The Circular Flow Model of a Market Economy

23. Keeping the Market Economy Flowing
Producers and consumers acting in their own self-interest “motivate” the market.
Competition among producers and consumers help “regulate” the market.
A market economy operates without any interference or direction.

24. Advantages of the Free Market
Free markets are efficient because they are self regulating.
They are able to respond efficiently to rapidly changing conditions.
Free markets encourage economic growth.
Entrepreneurs are always seeking profitable opportunities, contributing new ideas and innovation

25. Advantages of the Free Market
Free markets have a high degree of economic freedom.
Workers work where they want, firms are able to produce what they want, and individuals consume what they want.
Free markets offer a wider variety of goods and services than other systems.
Producers have incentives to meet consumers’ desires. Consumers basically decide what gets produced (consumer sovereignty)

26. Economics Ch. 2 Economic Systems
Section 4
Modern Economies

27. Mixed Economies
No single economic system has all the answers, so mixed economies developed
Early economists believed that allowing markets to operate freely without any government involvement (laissez faire) would provide the greatest benefit for consumers.
Others believe that there is a need for a certain limited degree of government intervention in the economy.

28. Governments Role as a Consumer
Purchases land, labor, and capital from households in the factor market.
Purchases goods and services from firms in the product market.

29. Governments Role as a Producer
Produces goods and services through the factor resources that they combine.
Example:
Public Transportation
Libraries
Schools
Police/Fire Protection
National Defense

30. Governments Role in Transferring Money
Collects taxes from both households and businesses.
Transfers the money they collect for a number of reasons:
Social Security
Worker disability
Unemployment
Survival of an Industry

31. Writing Assignment write a 5 paragraph essay on the following:
Writing Prompt;
Describe the role that you, an individual citizen, would play in each of the three economic systems that we discussed.

32. Circular Flow Diagram Exercise
Follow the instructions provided to complete the handout.